CU Real Estate Forum The Game is Still Going The Longest 7 th Inning Ever Presenter: Doug Wulf Monday, December 7, 2015
Out! Safe!
Where Are We in the Cycle? Recession-Recovery Table History is not on our side Recession Recovery/Expansion Period Length of Expansion Following Recession GDP Growth During Expansion Monthly Job Growth During Expansion (000s) 1948 Q1 1950 Q1 1953 13 qtrs 7.4% 182 1953 Q3 1954 Q2 1957 12 qtrs 4.1% 115 1957 Q3 1958 Q1 1960 7 qtrs 6.7% 165 1960 Q2 1961 Q3 1969 34 qtrs 5.1% 169 1969 Q1 1971 Q3 1973 11 qtrs 5.3% 198 1973 Q2 1975 Q4 1979 19 qtrs 3.5% 239 1980 Q4 1980 Q2 1981 3 qtrs 4.4% 145 1981 Q1 1983 Q2 1990 30 qtrs 4.4% 233 1990 Q2 1991 Q4 2000 39 qtrs 3.8% 203 2001 Q4 2001 Q4 2007 25 qtrs 2.7% 83 2007 Q3 2009 current 24 qtrs+ 2.2% 130 Average (48-01) 19.7 qtrs 4.8% 169.3 Source: National Bureau of Economic Research
Investors Are Drawn to the U.S. Fundamentals Office Rent Growth: U.S. Markets vs. Other Cities Around the World 20% 17% 10% 10% 8% 7% 7% 7% 6% 6% 6% 6% 4% 4% 4% 4% 4% 3% 0% 1% 1% 1% 0% 0% 0% -1% -1% -10% -20% San Francisco Chicago New York Phoenix Houston London (city) San Jose Paris (CBD) Dallas Denver San Diego Raleigh Minneapolis Boston Brussels Helsinki Berlin Sydney Beijing Frankfurt Rome Barcelona Shanghai Madrid Moscow -30% -40% Office Rent Growth, 2015 over 2014 Percent Change -35% Source: Cushman & Wakefield Research
U.S. Fundamentals Remain STRONG HH Balance Sheets Fantastic 14 13 12 11 10 9 Q1 81 Q4 84 Q3 88 Q2 92 Q1 96 Q4 99 Q3 03 Q2 07 Q1 11 Q1 15 HH Debt Service Ratio 2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 Soaring Corporate Profits Q2 01 Q4 02 Q2 04 Q4 05 Q2 07 Q4 08 Q2 10 Q4 11 Q2 13 Q1 15 Corporate Profits, $tril. Solid Bank Balance Sheets 14 13 12 11 10 9 8 Q2 01 Q4 02 Q2 04 Q4 05 Q2 07 Q4 08 Q2 10 Q4 11 Q2 13 Q1 15 Tier 1 capital ratio Source: Federal Reserve, Census Bureau, Cushman & Wakefield Research
Rent Growth: Who s Hot Office Asking Rents: 2015 Q3 over 2014 Q3, % Change 18% 16% 17% 14% 12% 10% 10% 8% 6% 4% 2% 6% 6% 5% 5% 5% 4% 4% 4% 2% 0% San Francisco Atlanta San Jose Denver Oakland Nashville Dallas Boston Phoenix Manhattan U.S. Source: Cushman & Wakefield Research
Denver s Office Sector Outlook Job Growth Forecast Total Nonfarm 70000 60000 50000 40000 30000 20000 48,000 37,933 32,833 24,967 17,900 3 2 Absorption Forecast Historical Avg. = 1.2 msf 10000 1 0 2014 2015 2016 2017 2018 0 2014 2015 2016 2017 2018 CW Moody's Oxford Average Denver Metro 28% Office-using Source: Cushman & Wakefield Research
Denver s Stunning Growth Trajectory Total Nonfarm Employment 2.3 2.1 1.9 1.7 1.5 1.3 1.1 0.9 0.7 2.11M 1.38M 855,000 1990 2000 2015 2020 2025 2030 Nearly the size of San Francisco Today (2.2 M) Source: BLS
Population and Office Supply Population MSF of Office Development 3,500,000 210 Population 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 180 150 120 90 60 30 0 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 MSF of Office Development
Office Building Deliveries Single Tenant and Multi Tenant MSF of Office Development 70 60 50 40 30 20 10 0 1980-1990 1991-2000 2001-2016
Supply Trends: Office Sector Denver Metro: Deliveries 8 7 6 MSF 5 4 3 2 15 Year Historical Average = 2.2M 1 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: CoStar, Cushman & Wakefield Research
Office Vacancy Remains Tight Denver Metro Vacancy 15% 14% 13% Historical Average = 13.2% 12% 9.9% 11% 10% 2006 1Q 2007 1Q 2008 1Q 2009 1Q 2010 1Q 2011 1Q 2012 1Q 2013 1Q 2014 Q1 2015 Q1 2016 Q1 Source: CoStar, Cushman & Wakefield Research
Denver s Office Sector Trends Demand (Net Absorption) 5.0 4.0 MSF 3.0 2.0 1.0 0.0-1.0-2.0 Historical Avg. = 1.2 msf -3.0 2000 2003 2006 Net Absorption 2009 2012 YTD 2015 Source: Cushman & Wakefield Research
Denver Office Rent Trends Rent Growth, Yr./Yr. 2014 Q3 15 Class A 5.5% 5.0% $31 $29 $27 $25 $23 $21 $19 $17 $15 Class B 5.0% 4.8% Q1 00 Q3 00 Q1 01 Q3 01 Q1 02 Q3 02 Q1 03 Q3 03 Q1 04 Q3 04 Q1 05 Q3 05 Q1 06 Q3 06 Q1 07 Q3 07 Q1 08 Q3 08 Q1 09 Q3 09 Q1 10 Q3 10 Q1 11 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 Q1 14 Q3 14 Q1 15 Q3 15 Class A Class B Source: Cushman & Wakefield Research
Historical and Projected Rent and Vacancy Trends Southeast Denver vs. Downtown Denver 25.00% $40.00 20.00% $35.00 15.00% 10.00% $30.00 $25.00 $20.00 SES Denver Vacancy Denver CBD Vacancy SES Denver Avg Rate Denver CBD Avg Rate 5.00% $15.00 0.00% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $10.00
The Rent Gap $60 $50 $40 $/SF $30 $20 $10 $0 Upper CBD & Existing Buildings New Construction CBD & Lower CBD Suburban A Buildings Suburban TOD A Buildings
Large Blocks of Space They Are Old Metro Denver 100,000 SF and Larger Number of Properties 25 20 15 10 5 0
Construction Costs Forecast Yr./Yr. Percent Change. 8% 6% 4% 3.3% 4.0% 4.5% 2% 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: ENR, Cushman & Wakefield Research
Downtown and Southeast Denver Projected Construction Costs Southeast Denver vs. Downtown Denver
Denver is NOT Houston Percent of Gross Metro Product Denver 6% Houston 17% Oil & Gas Other Mild Headwinds Only 6% of economy links to energy 96% of jobs created in Denver are in non-energy 20% of CBD leased to energy tenants Only 2.3 msf of office u/c Major Headwinds 17% of economy links to energy 51% of CBD leased to energy tenants 17 msf of office u/c Source: BEA, Cushman & Wakefield Research
Oil and Gas Occupancy Downtown Denver Source: Cushman & Wakefield Research
Oil and Gas Sublease Space 1,400,000 1,200,000 1,000,000 1.2 Million RSF Vacant 3,000 Jobs RSF 800,000 600,000 38 Subleases 400,000 9 Subleases 200,000 0 Jan. 2015 Dec. 2015 Sublease Space Plus "Shadow Space"
Where Will the Market Still be Hot? RiNo LoDo and Platte Valley Cherry Creek North SoBo to Gates Southeast TOD
Conclusions Vibrant, TOD/Amenity rich sites will capture the majority of office tenant demand and absorption going forward The emerging rent gap will widen Projected speculative office construction deliveries of 1-2 million SF per year during 2015-2018 for Metro Denver will NOT exceed tenant demand Limited well located sites and increasing land/construction costs will further limit new supply Energy is the wild card and 2016 will be the swing year one way or the other The game is not over, it will just be a little less exciting
CU Real Estate Forum The Game is Still Going The Longest 7 th Inning Ever Presenter: Doug Wulf Monday, December 7, 2015