FOCUS ON OFFICE
What are the Principal Forces at Work Today in Office Markets Across the Country?
COLORADO REAL ESTATE JOURNAL

By BILL TRESHAM
Published August 1, 2007

The principal forces at work today in office markets across the country are those of supply and demand. During the last several years, we have experienced steady job growth. Over that same period, and in many cities for much longer, there has been only a minimal supply of new office space added. As a result, vacancies have been steadily declining and rental rates have been steadily rising. And these trends will continue until job growth abates or the amount of space increases.

Denver is now following a pattern set by the U.S. coastal markets of New York, Washington, D.C., Boston and Southern California, for example, where vacancy reaches a level of around 10 percent to 12 percent, and rates begin to rise more rapidly, especially in the better buildings. New supply is only created when it appears that rates will make construction economic. If an investor wants a return on investment of 10 percent and it costs $350 per square foot to create a building, then we will see new supply only when the investor thinks he can achieve net rental rates of $35 per sf.

The Denver market, and downtown in particular, is now benefiting from the wisdom of its leaders who ensured that the great public venues were concentrated downtown. The citizenry also recognized the very serious transportation problems and has made a commitment to fix them. LoDo has become a phenomenon unto itself due to the foresight of developers and planners who recognized early the trend to urban living. Your tech, aerospace and telecommunication industries are “back” and on top of that, you are capturing more than your fair share of new business in these sectors. Add to all of this a seemingly insatiable global demand for energy and downtown Denver finds itself in a real sweet spot.

So with conditions set for rapidly rising rental rates, the true test for owners going forward is to provide customers with increasing levels of service. As rents continue to rise to the levels that prompt new supply, tenants will be willing to pay fair economic value for their officing needs. What will make them feel better about it, however, is being in buildings whose owners provide more value, too.

At Callahan, for example, we have reopened on-site property management offices in each of our buildings. Over the past several years, many owners were seen moving to an automation model where humans were removed from the equation and tenants ended up being directed to call centers in faraway places to have their concerns addressed. The real key to automation/digitization is doing it where it’s appropriate (i.e., investments in properties that enable the reduction of energy consumption). Tenants also need to feel safe and sound in their offices and landlords need to combine state-of-the-art systems with highly trained professionals to ensure this. In property management, a high degree of human touch is appropriate; great working relationships need to be developed and problems must be solved with a sense of urgency and care.

Finally, owners of buildings need to remember every day that we are in the service business. And, as the price of our service goes up, so do expectations for its quality. My hope then is that we’ll see higher levels of service and a “can-do” attitude by owners who understand that we can be important facilitators to the success of our customers.