Investors Are Still Buying Denver Real Estate — They're Just Choosier Now
Institutional investors still like Denver but are pickier about what they buy than they were before the coronavirus, seeking quality buildings and high-credit tenants to entice them to part with their money in a recovering capital markets environment rife with uncertainty.
Office and industrial sales in metro Denver topped more than $1B in the first quarter of 2022, a marked improvement over the past two years, according to data from CBRE.
“There are pockets of strength and pockets of weakness,” said John Jugl, vice chairman of the western region for Newmark and regional lead of the Denver office’s institutional investment platform.
Across all asset classes, buyers are looking for high-quality buildings, particularly new ones, as the flight to quality continues, Jugl said.
These buildings generally don’t require upgrades right away, allowing owners to hang onto more of their cash flow, a crucial aspect in today’s market where rents have stagnated in some segments, keeping profits lower.
However, longstanding, creditworthy tenants can also attract buyers, even in an older building.
That is what happened in the trade of 9151 East Panorama Circle in Centennial, which makes up a portion of the headquarters of Arrow Electronics. The 223K SF building sold to San Francisco-based Drawbridge Realty for $106M, or about $474 per SF.
Tech and electronics giant Arrow is one of Colorado’s largest employers and has a 10-year lease on the entire building.
“We’re laser-focused on buildings typically leased to high-quality tenants and which are strategically important to their operations in high-growth innovation markets, usually in suburban locations,” said Mark Whiting, co-founder, chairman and CEO of Drawbridge.
Drawbridge’s philosophy focuses on cities with population growth and research-based economies, Whiting said, meaning heavy concentrations of tech, electronics, defense and life sciences.
“Metro Denver is one of a dozen or so markets around the country where we see the type of growth in human capital and the research-based innovation economies … that foster fast-growing, high-quality companies,” he said.
The Denver area’s population growth has slowed in recent years when compared to the mid-2010s but is still moving upward at a rapid clip. The metro area has gained more than 819,000 new residents in the last 10 years, according to data from the Colorado State Demography Office.
This is the same strategy that Drawbridge employed before Covid-19, Whiting said, but it has become more important as the pandemic’s aftershocks have jolted markets around the globe.
“Before Covid, investing in suburban assets wasn’t getting much attention, but now, most capital sources will say they have a suburban strategy, and fortunately, that’s where we’re seeing most large corporate tenant demand today,” he said.
The Denver-area suburbs are certainly seeing their share of action, said Charley Will, first vice president with the capital markets team at CBRE’s Denver office. However, he pointed out that the suburbs have three times more office space than downtown Denver, creating more opportunities for acquisition because of sheer inventory.
Will has also seen a tendency toward newly built, high-quality buildings, especially those that are well-located with walkable access to retail, hotels and light rail, among other amenities.
“There’s not a big portion of office stock that checks all those boxes,” Will told Bisnow.
Additionally, investors are increasingly looking for buildings that fit into their environmental, social and governmental standards.
Still, there are challenges in the marketplace, with inflation ranking near the top of the list.
Inflation typically benefits assets, Jugl said, but the pandemic changed that this time around.
“Covid has decoupled inflation from asset values. In an inflationary environment, rents usually go up, but that isn’t happening,” he told Bisnow.
The coronavirus's impact on real estate, especially offices, has tamped down rent growth in most markets, so while it is more expensive to operate buildings than it was a year ago, landlords can’t charge more to make up the difference in their yields.
Additionally, inflation is slowly bringing an end to the period of record-low interest rates that freed up capital during the worst parts of the pandemic. The Federal Reserve has already initiated one hike of the base interest rate this year and is expected to continue raising rates in an effort to slow the country’s record inflation.
The capital markets are well aware of the changes coming to the cost of borrowing, Jugl said, and are expecting future rate hikes, which gives them a chance to prepare and make decisions accordingly.
“It’s not like it’s this hidden secret,” he said. "We know what’s going to take place with the Fed, and it’s going to be on the more aggressive side. It’s the environment we’re living in."
Still, “there’s still a ton of liquidity in the market” according to Will, who noted that real estate is still seen as a safe investment.