Market Data

Denver Delivers

Investors score big returns in most commercial property sectors.

C olorado's lackluster economy has not quenched investors' demand for Denver commercial real estate properties. Continued low interest rates have prompted many investors to use former stock market monies to buy retail, office, and industrial properties despite poor leasing fundamentals.

Retail Remains Resilient

Fueled by retail properties' perceived stability, "Demand for shopping center acquisitions in both the private capital markets and institutional markets remains at an all-time high," says D. Jeffrey Brock, CCIM, of CB Richard Ellis. Investors favor grocery-anchored shopping centers, pushing prices to never-before-seen levels. Last year, median multitenant shopping center prices increased 17 percent to $118 per square foot, according to Marcus & Millichap. Average multitenant capitalization rates decreased almost 4 percent in the second half of 2003, a major factor in the rising sales prices, according to Fuller and Co.

For example, last October Weingarten Realty Investors and AEW Capital Management purchased the 88,400-square-foot, Whole Foods-anchored Highlands Ranch University Park shopping center for $257.64 psf, a record psf price for a Denver grocery-anchored retail center, Brock says.

However, the influx of discounters such as Wal-Mart may dampen investors' enthusiasm for grocery-anchored shopping centers. "Cub Foods pulled out of the Denver market, and Albertsons dramatically slowed their expansion," Brock says.

Two new open-air lifestyle centers are adding more than 1 million sf of space to the Denver-area retail market this year. The first phase of Belmar, a mixed-use community on the former Villa Italia Mall site in Lakewood, recently opened with 650,000 sf of retail, including Linens 'n Things, DSW Shoe Warehouse, and Galyans. In Aurora, the first phase of the 300-acre Southlands mixed-use development is scheduled to open this fall featuring a Wal-Mart Supercenter, Sam's Club, and Kohl's.

Office Market Recovering

More than 50 Denver-area office buildings traded last year, according to Fuller and Co. Sydney, Australia-based financial services company Challenger International Ltd. purchased the two Invesco headquarters buildings downtown for $219 psf, a record in the Denver office market. Equity Office claimed the most expensive purchase when it acquired the 488,640-sf U.S. Bank Tower from the Carlyle Group for $80.2 million.

Despite the sales activity, Denver is still a tenants' market: In first-quarter 2004, vacancy crept to 18.3 percent, lease rates declined to $15.14 psf, and the market experienced negative 326,929-sf absorption, according to CB Richard Ellis. However, last year sublease space decreased 13 percent, and the total available space supply fell by more than 866,000 sf. Law, consulting, and energy companies lead downtown's leasing activity. For example, last year law firm Faegre and Benson took 72,199 sf and Cimarex Energy leased 46,567 sf in the Wells Fargo Center, and March USA and Mercer Consulting signed 64,266 sf in the 17th St. Plaza, according to Trammell Crow Co.

More Industrial Buyers Than Tenants

Demand for owner-occupied buildings and Denver's reputation as a distribution hub drive the area's industrial market. Due to abundant available capital, user building prices are at some of the highest psf values ever seen, according to John W. Segelke, CCIM, of Fuller and Co. Institutional investment remains strong as well. Sales for buildings greater than $1 million totaled more than $160 million last year, a significant increase from $95 million in 2002, according to Fuller and Co.

Only 800,000 sf of new speculative construction hit the market last year, but several major developers, including ProLogis, Lowe Enterprises, and Catellus, purchased large land parcels and have several projects in planning, says R.C. Myles, CCIM, SIOR, of Fuller and Co. The industrial leasing market also is rebounding. In first-quarter 2004 the overall vacancy rate fell below 5 percent for the first time in more than a year, and lease rates experienced the first increase in nine quarters to $5.11 psf, according to CB Richard Ellis.

Employment Growth Needed to Boost Multifamily

Colorado's lack of job growth is impeding the Denver multifamily market's recovery. Last year the vacancy rate peaked at more than 13 percent, while asking rents declined to $800 per month, a 1.7 percent decrease from 2002, according to Marcus & Millichap. "The current softness of our apartment market is the result of overbuilding in conjunction with low demand for apartment units," says Paul A. Delatorre, CCIM, of Sperry Van Ness. "With interest rates at historic low levels and no job growth, it will likely be another year before there is any significant improvement in the Denver metropolitan apartment market in terms of lower vacancies and increasing rental rates."

To combat the soft market, developers are reducing the number of new units. In 2003, approximately 7,900 units were completed, and only 2,200 are scheduled for this year, according to Fuller and Co. "Most of the properties under development are tax credit or bond-financed projects geared toward moderate-income tenants," Delatorre says.

Multifamily is the only property type in Denver that experienced an investment slowdown last year, but activity is expected to pick up. Approximately 30 transactions closed in the first two months of 2004, compared to 23 for the same period in 2003, Delatorre says. For properties more than $500,000, sales prices average $73,000 per unit with 7 percent cap rates, he says.

Savoring Salt Lake City
Strong investment activity adds a little spice to the local commercial real estate market.

Salt Lake City's investment market is "nothing but good news," says Kip Paul, Colliers Commerce CRG's investment specialist. Office, industrial, retail, and multifamily sales topped $615 million last year, an increase of 39 percent from 2002. If first quarter's $221 million investment volume is any indication, this year is on par to break last year's record, he says.

What drives such heavy investment activity In addition to low interest rates and investors' continued skepticism with the stock market, Salt Lake City offers extremely attractive capitalization rates, Paul says. In fact, approximately 50 percent of purchasers are out-of-state investors, particularly from California. Compared to the Golden State's 5 or 6 percent cap rates, investors can expect 8 percent cap rates on quality products in Salt Lake City, he explains. Also, the city doesn't experience big economic swings: "It's a very steady, solid market," Paul says.

Industrial, Office, and Retail on the Mend

Within a one-day truck drive to the West Coast, Salt Lake City is an excellent distribution hub, and its inexpensive labor and lease rates attract both industrial users and investors, Paul says. Last year industrial investment sales skyrocketed to nearly 2.3 million square feet, more than triple 2002's 443,000-sf investment sales volume, according to CB Richard Ellis.

Due to an increase in vacancies and depressed lease rates, buyers purchased buildings well below asking prices. For example, average sales prices for industrial properties greater than 100,000 sf were $20.60 per square foot, compared to $27.15-psf average asking prices, according to NAI Utah.

However, the industrial market appears poised for a turnaround. First-quarter 2004 vacancy dropped approximately one-half a percentage point from year-end, and lease rates remained steady at 31 cents psf per month triple net, according to Colliers Commerce CRG. Average sales prices jumped to $45.62 psf in the first quarter, up from $33.40 psf at year-end, and were slightly higher than average asking sales prices of $45.02 psf.

Although vacancy remains high and little product is being built, office investment volume also remains high, Paul says. He attributes the high activity level to entrepreneurial investors snapping up low-quality product from owners tired of fighting vacancy and leasing difficulties. Yet after a stagnant year, metropolitan-area class A lease rates rose slightly to $20.58 psf in the first quarter, and overall vacancy dropped to 16.09 percent, from 16.69 percent at year-end, according to Colliers Commerce CRG.

Only four new office buildings totaling 299,000 sf came on line last year, and three more currently are under construction. Although several more properties are in planning, the moderate construction pace should help office absorption continue to grow. The central business district absorbed 48,085 sf in the first quarter, up from 22,281 sf absorbed during fourth-quarter 2003, according to Colliers Commerce CRG.

With approximately 8 percent vacancy, retail is the healthiest Salt Lake City commercial property type and the most in demand by investors and developers, Paul says. Big-box retailers such as Wal-Mart, Costco, and Home Depot lead the construction surge, but many older class B shopping centers struggle to fill space despite lower rental rates. First-quarter 2004 lease rates for anchorless strip centers less than 50,000 sf were $13.06 psf and vacancy was 12.6 percent, compared to 100,000-sf to 350,000-sf community centers, which commanded $15.89-psf lease rates and were only 7.8 percent vacant, according to Colliers Commerce CRG. Community centers absorbed 47,976 sf in the first quarter, while anchorless strip centers gained 87,210 sf.

Multifamily Fundamentals Flat

In Salt Lake County, "Demand for multifamily product remains very high, while product remains in short supply," says Mark B. Millburn, CCIM, CRE, of EquiMark Properties. Per-unit sales prices for 100-unit-or-more properties in Salt Lake County increased to $60,713 last year from $54,912 in 2002, while cap rates declined to 7.7 percent from 8.4 percent one year previous. At $98,000 per unit, Wasatch Acquisitions' purchase of the 174-unit Pinehurst Apartments in Midvale from Northwestern Mutual broke Salt Lake City's per-unit price record by $15,000, he says.

Although a boon for investors, the low interest rates are adversely affecting landlords. "Homeownership affordability and slow job growth continue to impede the ability of apartment owners to increase occupancies and rental rates," Millburn says. Although vacancy dropped one percentage point to 9.9 percent, average rental rates at year-end 2003 were $627, a 3.4 percent decrease from 2002, according to EquiMark Properties.

Unabated development also is contributing to the flat rental rates. Last year 813 new units hit the market, and 1,317 are coming on line this year, according to EquiMark Properties. More than 50 percent of new units are affordable housing, including Utah NonProfit Housing's 88-unit Willow Park Apartments and Community Housing's 79-unit Gerald Wright Senior Housing, both in West Valley. Utah NonProfit Housing has two more projects scheduled to break ground this summer that will add 117 more affordable-housing units to Salt Lake County's inventory.

"Continued operational flatness will slowly turn to low-to-moderate rent growth, subject to job growth and the number of newly constructed units delivered," Millburn says. "Notwithstanding, vacancy and rental rates may not see any noticeable improvement until 2005."

Gretchen Pienta

William T. Adams, CCIM, CRB, is owner of Adams Realtors in Atlanta. Contact him at 404.688.1222 or wtadams@ccim.net.Gretchen Pienta is associate editor of Commercial Investment Real Estate.

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