The Game is Still Going… The Longest 7th Inning Ever Presenter: Doug Wulf Monday, December 7, 2015
CU Real Estate Forum
Out! Safe!
CU Real Estate Forum / December 7, 2015
Where Are We in the Cycle?
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
Recession-Recovery Table
Source: National Bureau of Economic Research
History is not on our side
CU Real Estate Forum / December 7, 2015
Investors Are Drawn to the U.S. Fundamentals
Office Rent Growth: U.S. Markets vs. Other Cities Around the World
17%
10% 8% 7% 7% 7% 6% 6% 6% 6%
4% 4% 4% 4% 4% 3% 1% 1% 1% 0% 0% 0%
-1% -1%
-35% -40%
-30%
-20%
-10%
0%
10%
20%
San
Fran
cisc
o
Chi
cago
New
Yor
k
Phoe
nix
Hou
ston
Lond
on (c
ity)
San
Jose
Paris
(CB
D)
Dal
las
Den
ver
San
Die
go
Ral
eigh
Min
neap
olis
Bos
ton
Bru
ssel
s
Hel
sink
i
Ber
lin
Sydn
ey
Bei
jing
Fran
kfur
t
Rom
e
Bar
celo
na
Shan
ghai
Mad
rid
Mos
cow
Office Rent Growth, 2015 over 2014 Percent Change
Source: Cushman & Wakefield Research
CU Real Estate Forum / December 7, 2015
U.S. Fundamentals Remain STRONG
9
10
11
12
13
14
Q1
81Q
4 84
Q3
88Q
2 92
Q1
96Q
4 99
Q3
03Q
2 07
Q1
11Q
1 15
HH Debt Service Ratio
HH Balance Sheets Fantastic
0.40.60.8
11.21.41.61.8
2
Q2
01Q
4 02
Q2
04Q
4 05
Q2
07Q
4 08
Q2
10Q
4 11
Q2
13Q
1 15
Corporate Profits, $tril.
Soaring Corporate Profits
89
1011121314
Q2
01Q
4 02
Q2
04Q
4 05
Q2
07Q
4 08
Q2
10Q
4 11
Q2
13Q
1 15
Tier 1 capital ratio
Solid Bank Balance Sheets
Source: Federal Reserve, Census Bureau, Cushman & Wakefield Research
CU Real Estate Forum / December 7, 2015
Rent Growth: Who’s Hot
Office Asking Rents: 2015 Q3 over 2014 Q3, % Change
Source: Cushman & Wakefield Research
17%
10%
6% 6% 5% 5% 5% 4% 4% 4% 2%
0%2%4%6%8%
10%12%14%16%18%
San
Fran
cisc
o
Atla
nta
San
Jose
Den
ver
Oak
land
Nas
hvill
e
Dal
las
Bos
ton
Phoe
nix
Man
hatta
n
U.S
.
CU Real Estate Forum / December 7, 2015
Denver’s Office Sector Outlook
Job Growth Forecast Total Nonfarm
28% Office-using
0
1
2
3
2014 2015 2016 2017 2018
Denver Metro
Absorption Forecast
Historical Avg. = 1.2 msf
48,000
37,933 32,833
24,967 17,900
0
10000
20000
30000
40000
50000
60000
70000
2014 2015 2016 2017 2018
CW Moody's Oxford Average
Source: Cushman & Wakefield Research
CU Real Estate Forum / December 7, 2015
Denver’s Stunning Growth Trajectory
Total Nonfarm Employment
855,000
1.38M
2.11M
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
1990 2000 2015 2020 2025 2030
Nearly the size of San Francisco Today (2.2 M)
Source: BLS
CU Real Estate Forum / December 7, 2015
Population and Office Supply
0
30
60
90
120
150
180
210
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,00019
80
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
MSF
of O
ffice
Dev
elop
men
t
Popu
latio
n
Population MSF of Office Development
CU Real Estate Forum / December 7, 2015
Single Tenant and Multi Tenant
Office Building Deliveries
0
10
20
30
40
50
60
70
1980-1990 1991-2000 2001-2016
MS
F of
Offi
ce D
evel
opm
ent
CU Real Estate Forum / December 7, 2015
Denver Metro: Deliveries
Supply Trends: Office Sector
Source: CoStar, Cushman & Wakefield Research
0
1
2
3
4
5
6
7
820
00
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
MSF
15 Year Historical Average = 2.2M
CU Real Estate Forum / December 7, 2015
10%
11%
12%
13%
14%
15%
2006
1Q
2007
1Q
2008
1Q
2009
1Q
2010
1Q
2011
1Q
2012
1Q
2013
1Q
2014
Q1
2015
Q1
2016
Q1
Denver Metro Vacancy
Office Vacancy Remains Tight
Historical Average = 13.2%
Source: CoStar, Cushman & Wakefield Research
9.9%
CU Real Estate Forum / December 7, 2015
Denver’s Office Sector Trends
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
2000
2003
2006
2009
2012
YTD
201
5
MSF
Net Absorption
Historical Avg. = 1.2 msf
Source: Cushman & Wakefield Research
Demand (Net Absorption)
CU Real Estate Forum / December 7, 2015
Denver Office Rent Trends
$15$17$19$21$23$25$27$29$31
Q1
00Q
3 00
Q1
01Q
3 01
Q1
02Q
3 02
Q1
03Q
3 03
Q1
04Q
3 04
Q1
05Q
3 05
Q1
06Q
3 06
Q1
07Q
3 07
Q1
08Q
3 08
Q1
09Q
3 09
Q1
10Q
3 10
Q1
11Q
3 11
Q1
12Q
3 12
Q1
13Q
3 13
Q1
14Q
3 14
Q1
15Q
3 15
Class A Class B
2014 Q3 15
Class A 5.5% 5.0%
Class B 5.0% 4.8%
Rent Growth, Yr./Yr.
Source: Cushman & Wakefield Research
CU Real Estate Forum / December 7, 2015
Southeast Denver vs. Downtown Denver
Historical and Projected Rent and Vacancy Trends
$10.00
$15.00
$20.00
$25.00
$30.00
$35.00
$40.00
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
SES Denver Vacancy
Denver CBD Vacancy
SES Denver Avg Rate
Denver CBD Avg Rate
CU Real Estate Forum / December 7, 2015
The Rent Gap
$0
$10
$20
$30
$40
$50
$60
Upper CBD &Existing Buildings
New Construction CBD& Lower CBD
Suburban ABuildings
Suburban TODA Buildings
$/SF
CU Real Estate Forum / December 7, 2015
Metro Denver 100,000 SF and Larger
Large Blocks of Space – They Are Old
0
5
10
15
20
25
Num
ber o
f Pro
perti
es
CU Real Estate Forum / December 7, 2015
Yr./Yr. Percent Change.
Construction Costs Forecast
Source: ENR, Cushman & Wakefield Research
3.3%
4.0% 4.5%
0%
2%
4%
6%
8%
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
CU Real Estate Forum / December 7, 2015
Southeast Denver vs. Downtown Denver
Downtown and Southeast Denver Projected Construction Costs
CU Real Estate Forum / December 7, 2015
Denver is NOT Houston
Percent of Gross Metro Product
Source: BEA, Cushman & Wakefield Research
17%
Oil & GasOther
6%
Houston Denver
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
CU Real Estate Forum / December 7, 2015
Oil and Gas Occupancy
Downtown Denver
Source: Cushman & Wakefield Research
CU Real Estate Forum / December 7, 2015
Oil and Gas Sublease Space
9 Subleases
38 Subleases
1.2 Million RSF Vacant
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
Jan. 2015 Dec. 2015 Sublease SpacePlus "Shadow
Space"
RSF
3,000 Jobs
CU Real Estate Forum / December 7, 2015
Where Will the Market Still be Hot?
• RiNo
• LoDo and Platte Valley
• Cherry Creek North
• SoBo to Gates
• Southeast TOD
CU Real Estate Forum / December 7, 2015
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
The Game is Still Going… The Longest 7th Inning Ever Presenter: Doug Wulf Monday, December 7, 2015
CU Real Estate Forum