DENVER | Main Development Thread #7

[mishko27]

Originally Posted by laniroj

Commie blocks actually look better because they don't have a parking podium...

Yeah, but as a Slovak, let me tell you, I wish they did. Parking around the estates is just abysmal, it's a total chaos these days. Arguably, people drive way less and you usually have one car per family as you simply do not need more than that, but the commies still did not plan for that.

Arguably, I grew up hating "paneláky" (plural of panelák, a building made of panels, the Slovak word for commie blocks) and "sídliská" (commie estates, as in whole city districts full of commie blocks). They are compact and have great transit, but there was next to no retail, very few (if any) cultural institutions, no restaurants or bars available. It's vastly different now and they are actually desirable place to live these days.

I digress. That building, especially the white / grey part does look like a panelák out of Košice. It's kinda wild.

[TakeFive]

The State of Office Space in Denver

Want to see something interesting and impressive, CHECK THIS OUT
Mile High CRE featured this property in April of 2022.
Fast-forward and BusinessDen now reports this building is in Foreclosure.

Cushman & Wakefield: Five Fast Facts for Office ... Markets in Denver
August 21, 2023 Mile High CRE

The Denver metro office net absorption continues to trend negative with downsizing and tenant move-outs, however, asking rents remain steady at the end of Q2 2023.

• Vacancy, Sublease Availability Falls Slightly
• Leasing Activity decreases in Second Quarter 2023
• Net Absorption Continues to Trend Negative -- Absorption continues to be heavily impacted by downsizing and tenant move-outs, resulting in 1.5 msf of negative net absorption in Q2 2023, a decline from the negative 0.8 msf of negative absorption recorded in Q2 2022.

This was just reported by the DBJ
Slack looks to unload 80K SF of office space in downtown Denver

Not sure how important but perhaps Interesting?
Coworking in Broomfield is 49% Cheaper than Traditional Office ...
August 28, 2023 Mile High CRE

Just the Same

[bunt_q]

This is what gets me:

Vacancy, Sublease Availability Falls Slightly
Overall vacancy decreased 20 basis points QOQ in Q2 2023, while sublease availability fell to 6.2 msf.

Leasing Activity decreases in Second Quarter 2023
The Denver Metro recorded just 1.4 msf of leasing activity in Q2 2023, a decrease of 21.8% compared to Q1 2023.

Net Absorption Continues to Trend Negative
Absorption continues to be heavily impacted by downsizing and tenant move-outs, resulting in 1.5 msf of negative net absorption in Q2 2023, a decline from the negative 0.8 msf of negative absorption recorded in Q2 2022.

But....

Asking Rents Remain Steady
Rental rate growth remained stable QOQ, ending Q2 2023 at an average rate of $31.84 per square foot (psf) on an overall basis. This represented a $0.18-psf increase QOQ and an $0.48-psf increase compared to Q2 2022.

There needs to be a reckoning amongst office building owners and brokers. We were actually looking to expand, but the lease rates were unforgiving, and the tenant finish was getting priced at double estimates. So we walked away and kept our smaller crappier space.

It makes no sense to me that, given vacancy trends, there is zero reduction in rents. It's almost like the office market is just broken. They'd rather hold out for $10, and end up in foreclosure with $2, rather than take $6 and be full and, just perhaps, become a part of restoring the vibrancy that will sustain their business model (and real estate value) for decades to come.

Much the way some on here feel about robots replacing transportation engineers, I will be pleased when robots replace all real estate brokers. (Assuming the robots show up before the towers of skulls do; I can't say for certain which way society is trending.)

[TakeFive]

Very Interesting

Originally Posted by bunt_q

This is what gets me:

There needs to be a reckoning amongst office building owners and brokers. We were actually looking to expand, but the lease rates were unforgiving, and the tenant finish was getting priced at double estimates. So we walked away and kept our smaller crappier space.

It makes no sense to me that, given vacancy trends, there is zero reduction in rents. It's almost like the office market is just broken. They'd rather hold out for $10, and end up in foreclosure with $2, rather than take $6 and be full and, just perhaps, become a part of restoring the vibrancy that will sustain their business model (and real estate value) for decades to come.

Much the way some on here feel about robots replacing transportation engineers, I will be pleased when robots replace all real estate brokers. (Assuming the robots show up before the towers of skulls do; I can't say for certain which way society is trending.)

Love the Bots

Here's what I just read tonight on "Bisnow":
Remote Work Will Persist, Goldman Forecasts, Bringing More Pain For Office Landlords Through 2030

Impacts of the remote work revolution on landlords are expected to grow as leases expire and tenants renew for smaller spaces, according to a new report by Goldman Sachs.

This doesn't even speak to the financial mess that's brewing.

I recall that December last year that Block 162 just went over 50% occupancy (finally). My guess here is the project was totally or substantially self-funded by USAA so they can afford to be as patient as they want.

Mostly, it's how well the economy, including Denver's 'seems' to be doing.

My 1st prediction: the dam will break ~18 months from now.

My 2nd prediction: Nikki Haley will be the next President based largely on being the only notable Adult in the Room.

Edit: that reminds me I found a wonderful site (pdf) about CDOT's ten year plan updated to include iija info as of Sept 2022. It's a nice easy-to-read vision of various projects currently moving forward. Just the right amount of detail without giving one a headache.

[COtoOC]

Originally Posted by TakeFive

Very Interesting

Love the Bots

Here's what I just read tonight on "Bisnow":
Remote Work Will Persist, Goldman Forecasts, Bringing More Pain For Office Landlords Through 2030

This doesn't even speak to the financial mess that's brewing.

I recall that December last year that Block 162 just went over 50% occupancy (finally). My guess here is the project was totally or substantially self-funded by USAA so they can afford to be as patient as they want.

Mostly, it's how well the economy, including Denver's 'seems' to be doing.

My 1st prediction: the dam will break ~18 months from now.

My 2nd prediction: Nikki Haley will be the next President based largely on being the only notable Adult in the Room.

Edit: that reminds me I found a wonderful site (pdf) about CDOT's ten year plan updated to include iija info as of Sept 2022. It's a nice easy-to-read vision of various projects currently moving forward. Just the right amount of detail without giving one a headache.

I can't completely gauge how big this trend is, but quite a few people I know are being forced back into the office soon, myself included. Seems to be a corporate trend to increase pollution and traffic Although like my return to office, many won't be in seats 5 days per week, but it could be enough by mid 2024 to impact the office market.

[bunt_q]

Are you guys doing 3 days?

Are you keeping dedicated individual space for employees, or will you move to a hoteling model?

Just curious.

[wong21fr]

Originally Posted by COtoOC

I can't completely gauge how big this trend is, but quite a few people I know are being forced back into the office soon, myself included. Seems to be a corporate trend to increase pollution and traffic Although like my return to office, many won't be in seats 5 days per week, but it could be enough by mid 2024 to impact the office market.

Seems like September is the big month for the return to the office movement with the three day per week option being the most prevalent. Know a number of people as well who have been given their marching order to get their butts back into their office chairs. It will be interesting to see just how observable the impact is.

Now if the City of Denver would reopen the development review walk-up counter and bring back in-person review sessions...

[laniroj]

Originally Posted by bunt_q

..It makes no sense to me that, given vacancy trends, there is zero reduction in rents. It's almost like the office market is just broken. They'd rather hold out for $10, and end up in foreclosure with $2, rather than take $6 and be full and, just perhaps, become a part of restoring the vibrancy that will sustain their business model (and real estate value) for decades to come...

It makes perfect sense. They bought the building at a 5 cap (if they were lucky and didn't compress below that) and now if they don't get the asking rent they give the keys back to the bank anyway. So they can hope to get it in the next 12 months or they walk away - either way the discounted rent doesn't work for the current owner. Companies don't remain a going concern by bleeding out on non-performing properties and funding huge deficits - much easier to just hand the keys over given most of these huge office buildings likely have non-recourse financing. Once the bank takes it over, auctions it off, or sells the loan for $0.50 on the $1.00 that new owner will accept that lower rent...

[SirLucasTheGreat]

Are the lenders behind these depreciated office towers going to have liquidity problems when they auction off their vacant buildings? It seems like there will be substantial losses there.

By the way, active excavation appears underway at Parq II in Golden Triangle. Parq II will help fill in that wall of buildings on Speer.

[wong21fr]

Originally Posted by laniroj

It makes perfect sense. They bought the building at a 5 cap (if they were lucky and didn't compress below that) and now if they don't get the asking rent they give the keys back to the bank anyway. So they can hope to get it in the next 12 months or they walk away - either way the discounted rent doesn't work for the current owner. Companies don't remain a going concern by bleeding out on non-performing properties and funding huge deficits - much easier to just hand the keys over. Once the bank takes it over, auctions it off, or sells the loan for $0.50 on the $1.00 that new owner will accept that lower rent...

This is especially relevant to the discussion:

Brookfield pledged tens of millions in cash, future profit growth to refinance an iconic Denver skyscraper

Looks like Brookfield doesn't have a ton of incentive to lower lease rates given the structure. They have to maximize cash flow to meet the loan payments, not even mentioning the excess cash flow going to to the CMBS holders. So no lease rate reductions, but maybe improved tenant finishes given the pre-paid account?

[bunt_q]

Originally Posted by laniroj

It makes perfect sense. They bought the building at a 5 cap (if they were lucky and didn't compress below that) and now if they don't get the asking rent they give the keys back to the bank anyway. So they can hope to get it in the next 12 months or they walk away - either way the discounted rent doesn't work for the current owner. Companies don't remain a going concern by bleeding out on non-performing properties and funding huge deficits - much easier to just hand the keys over given most of these huge office buildings likely have non-recourse financing. Once the bank takes it over, auctions it off, or sells the loan for $0.50 on the $1.00 that new owner will accept that lower rent...

Yeah, I get it. Brookfield/Republic Plaza is an concerning one, though. They defaulted, avoided foreclosure through a restructuring, and are right back to the same old model. Maybe every city will have a few all star buildings that can play by the old rules (could debate whether Republic Plaza will be one of those). But otherwise it screams of good money after bad/doubling down on a bad hand. Given the new deal is through March 26, I assume that's just buying time to try and fill at, as you said, full rates. But there's an awful lot of wishful thinking going on. Personally, I won't shed a tear if they all lose half their value/go under. Will be better for the city to just get on with it, figure out who the couple winners will be, and let the rest fail dramatically and rapidly so we can look to whatever comes next.

[COtoOC]

Originally Posted by bunt_q

Are you guys doing 3 days?

Are you keeping dedicated individual space for employees, or will you move to a hoteling model?

Just curious.

3 days per week with a dedicated cage.

[COtoOC]

Originally Posted by wong21fr

Seems like September is the big month for the return to the office movement with the three day per week option being the most prevalent. Know a number of people as well who have been given their marching order to get their butts back into their office chairs. It will be interesting to see just how observable the impact is.

Now if the City of Denver would reopen the development review walk-up counter and bring back in-person review sessions...

I don't have to go back until early next year, but I'm hearing 3 days is common. I don't work downtown, but hopefully we can observe some impact. Other than heavier freeway traffic.

[bunt_q]

Originally Posted by COtoOC

I don't have to go back until early next year, but I'm hearing 3 days is common. I don't work downtown, but hopefully we can observe some impact. Other than heavier freeway traffic.

No no no. Our leaders are expecting us to use the extra time we have by only going in 3 days to take the buses/trains (3 transfers later) or ride a bike. You'd have to spend 5 hours/week commuting if it was 5 days. Why would it be unreasonable to expect you to spend that same 5 hours spread over 3 days?

[TakeFive]

Resetting the Landscape

A One

It's hard to appreciate the impact of $Trillions in Infrastructure spending from three separate infrastructure bills passed over the last two years.

mhays (Give him credit, he's smarter than he looks) pointed out how the majority of spending for manufacturing related investments will be in Red States.

A Two

In times past a recession would flush out the crap and reset the playing field. I don't see that playing out the same this time. It's likely to be more of a rolling reset.

A Three

I'll predict that today's interest rates become the New Normal over the next decade. That means that yesterday's 5 cap rate when interest rates were very low and money was easy will become an 8 Cap for new buildings and for others more like a 10 Cap or higher depending....

Disagree

Originally Posted by wong21fr

Looks like Brookfield doesn't have a ton of incentive to lower lease rates given the structure. They have to maximize cash flow to meet the loan payments, not even mentioning the excess cash flow going to to the CMBS holders. So no lease rate reductions, but maybe improved tenant finishes given the pre-paid account?

75 cents on the dollar is still a hell of a lot more than empty space.

[COtoOC]

Originally Posted by bunt_q

No no no. Our leaders are expecting us to use the extra time we have by only going in 3 days to take the buses/trains (3 transfers later) or ride a bike. You'd have to spend 5 hours/week commuting if it was 5 days. Why would it be unreasonable to expect you to spend that same 5 hours spread over 3 days?

I've tried the R line down to Lone Tree in the past. On the positive side, I can quickly walk from the train into my office. The negative: the R line through Aurora is too slow, so even with heavy traffic, I can get to the office quicker by driving. And I have a hybrid so round trip is probably half the cost of the train ticket. And then the issue of hoping my car and cat converter are still there when I get back to the park and ride. It made sense a few years ago to take the train if it was snowing, but now, forget it. Not worth the risk.

[wong21fr]

Originally Posted by COtoOC

I've tried the R line down to Lone Tree in the past. On the positive side, I can quickly walk from the train into my office. The negative: the R line through Aurora is too slow, so even with heavy traffic, I can get to the office quicker by driving. And I have a hybrid so round trip is probably half the cost of the train ticket. And then the issue of hoping my car and cat converter are still there when I get back to the park and ride. It made sense a few years ago to take the train if it was snowing, but now, forget it. Not worth the risk.

For a hybrid especially as they scream, "take my convertor!" given the higher concentration of metals in their units. Hopefully you're not street parking in CP either as that's a recipe for inviting theft.

It will be interesting see what vehicle theft options develop as EV market penetration increases. I'm planning to purchase an EV, but will wait until the Generation 5 batteries are available for vehicle models in 2026-2028 when the energy storage density will double and range anxiety disappears.

[TakeFive]

Ground Zero Two

Originally Posted by wong21fr

It will be interesting see what vehicle theft options develop as EV market penetration increases. I'm planning to purchase an EV, but will wait until the Generation 5 batteries are available for vehicle models in 2026-2028 when the energy storage density will double and range anxiety disappears.

Early on the AZ legislature passed a resolution that autonomous vehicles were welcome in Arizona. Subsequently Google/Waymo has been operating out of Chandler since 2017. They use fully electric Jaguar I-PACEs. The Waymo One ride-hailing service opened to the public in October 2022 in Phoenix; they now pick up at Sky Harbor and downtown Phoenix and downtown Scottsdale areas. Cruise is down here but don't see that many of those.

Tesla's are big down here and Uber offers a 'Green' rider option. A lot of Prius's of course and a bunch of Rivians also.

My guess is that this revolution becomes more of an evolution but it should be fun to watch.

[wong21fr]

Originally Posted by SirLucasTheGreat

Are the lenders behind these depreciated office towers going to have liquidity problems when they auction off their vacant buildings? It seems like there will be substantial losses there.

By the way, active excavation appears underway at Parq II in Golden Triangle. Parq II will help fill in that wall of buildings on Speer.

On the excavation front: Looks like the AMLI project at 8th & Broadway is getting closer to a ground breaking. AMLI switched contractors from Milender White to Swinerton in June along with applying for a shoring and excavation permit. Hopefully we will see construction commence in late Q3/early Q4.


And AMLI just went through another round of design review for their 9th & Broadway project which keeps on chugging through the permitting process. Crazy how much these two projects, as well as the Gart development, will change Broadway from Speer towards the CBD.


Oh, and Channel 7's new building in RiNo has satellite dishes being installed on the rooptop. Looks like the they won't be doing any live shots with a skyline background.

[mhays]

Originally Posted by TakeFive

Resetting the Landscape

A One

mhays (Give him credit, he's smarter than he looks) pointed out how the majority of spending for manufacturing related investments will be in Red States.

I said much of the money is going to rural areas rather than urban areas. I said nothing about red states. Though yes, they'll get a lot.