DENVER | Main Development Thread #7

[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 — 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.

[TakeFive]

Originally Posted by wong21fr

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.

Perhaps they're working to make the project pencil better?


Luxury Condo Building Proposed for Cherry Creek North
August 29, 2023 -- Mile High CRE

PMG, a national investment, development and asset management firm, is proposing the construction of a new 5-story, 172,000-square-foot luxury condo building at 185 N. Steele St. in Cherry Creek North.

Design documents submitted to the city in April indicate that the brand associated with the development is Waldorf Astoria, a luxury Hilton brand. The architect for the project is Shears Adkins Rockmore.

I knew I recognized the name

In July 2021, PMG and Toronto-based private equity and asset management firm Greybrook Realty Partners purchased the Denver7 building on the 2.3-acre site at 123 Speer Blvd. for $35 million.

--------------------------

Originally Posted by mhays

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.

I gave you credit for not thinking we are talking about corn and grain elevators - so suburban as apposed to urban? Got it.

[mhays]

I said rural...right in the post you quoted, on this page.

[bunt_q]

Potato potahto. Ain’t no difference between ticky tacky suburbia and grain elevators. There be dragons...

Waldorf Astoria at 2nd and Steele? Pardon my language, but — me, man. What are we becoming.

[COtoOC]

Originally Posted by wong21fr

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.

Never park on the street!! I don't get the people around here who refuse to use their garage (usually full of —... I thought that's what basements were for?) but we always park in our garage. I had my cat engraved (probably little deterrent) but have been considering having it caged.

I've had the same thoughts on EVs. Just wait a few years for the tech to get better.

[TakeFive]

Well Done

Originally Posted by bunt_q

Potato potahto. Ain’t no difference between ticky tacky suburbia and grain elevators. There be dragons...

It occurred to me later the difference could be semantics.

Samsung's new site in Taylor TX NW of Austin fits. New Albany International Business Park which Columbus sees as a suburb is where Intel's new site is just a huge plot of land, so far.

It's fair to say the advantage of 'depending' on China was we didn't have to deal with the mess of building factories in the U.S. that gobble up large tracts of land. Soon new EV and battery plants will join the many Auto factories that have planted flags in the SE.

[laniroj]

Originally Posted by wong21fr

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?

Who knows. I suspect Brookfield is just trying to bridge the gap to better times. They are so big thy can sell performing assets to cover their office woes in the short term provided they think that leads to a promised land - which apparently they might. That said, it's not really a viable long term strategy.

[laniroj]

Originally Posted by bunt_q

...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.

I'm a bit more worried about than scenario than you. Downtowns broadly speaking are still all in somewhat disarray with these vacant office buildings and lack of warm bodies on the streets. Brookfield quite literally owns the nicest office assets in every large city and they're one of the largest most well capitalized owners on the planet outside maybe a Black Rock type. If they suddenly give up some of the best real estate around, it could be a trigger for owner's further down the ladder and lead to another mass downtown exodus a la 1950's...

[wong21fr]

Originally Posted by laniroj

Who knows. I suspect Brookfield is just trying to bridge the gap to better times. They are so big thy can sell performing assets to cover their office woes in the short term provided they think that leads to a promised land - which apparently they might. That said, it's not really a viable long term strategy.

That's a sensible view. Anyone who thinks the WFH revolution has finished playing out is being foolish. The wave is now going back out and the big question remains just how much less commercial office space will required for a office environment where the (most likely) scenario is a hybrid approach. Is it 10%? 30%? No one knows yet and a few years of additional runway is beneficial.

[laniroj]

Originally Posted by TakeFive

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

Not really. A long term Class A owner seeking a 10-15 year lease can have the space sit vacant for 2.5 years before taking that 75 cents. They are betting that a real return to office happens within the next 12 months and why wouldn't they. Class A office owners near and far are making that bet because most signs are pointing to company mandated RTO. We'll see where the dice fall.