Denver commercial investments fall to $250 million

Exclusive: Denver commercial investments fall to $250 million

Patrick Devereaux, an investment broker at Cushman & Wakefield, found that commercial real estate sales this year in the Denver area are at the lowest point in recent memory.

Investors purchased only $250 million in Denver-area commercial real estate properties this year, the lowest tally on record.

And a single deal, the $134.25 million purchase of the 32-story, 17th Street Plaza, accounted for 53.7 percent of the total sales volume. Without that deal, there would have only been $115.750 million of office, industrial and retail properties of more than $1 million each, shows the report released to InsideRealEstateNews.com by Patrick Devereaux, a senior director of the Capital Markets Group for the Denver office of Cushman & Wakefield.

“What is going on in commercial real estate is analogous to what is happening in residential real estate,” Devereaux said in an interview in his office at Independence Plaza in downtown Denver. In a nutshell: Fewer properties are selling for less money.

But the downturn is even more pronounced on the income-property side.

This year’s sales volume is 85.7 percent lower than the $1.725 billion in sales in 2008, the biggest year-over-year percentage drop on record. It was the first time since 1996 that the sales volume had dropped below $1 billion. Even in 1992 – as far back as Devereaux’s records go - there was $365 million in sales, 31.5 percent more than this year. And while sales volumes in the 1980s at times fell below $250 million, if adjusted for inflation, they almost certainly were higher in today’s dollars.

Indeed, J.P. Morgan this year sold 17th Street Plaza for an estimated 30 percent to 40 percent less than it was it had been negotiating to sell it for last year. But even at the reduced price, the purchase of the 662,653-square-foot building by HRPT Properties Trust, a real estate investment trust, was one of the largest office deals of the year in the country. The building was sold by Mary Sullivan and Tim Swan of CB Richard Ellis. REITs, priced out of the buying sprees of a few years ago, are returning to the market because they can raise money on Wall Street and acquire buildings at a low enough price that they can pay investors dividends, Devereaux said.

And, also, as with the residential market, “all of the buyers want to feel as if they’re getting deals,” Devereaux said.

And they are, he said.

Investors are buying properties at below replacement cost, he said.

And with the residential sales market, it is difficult for buyers to get loans.

“Only a handful of banks are really in the market,” Devereaux said. And buyers need to make hefty down payments, just like someone buying an expensive home, he noted.

There also is a disconnect between prospective buyers and and property owners, he said.

Buyers are looking for “value-add” opportunities, where they can buy properties cheap, fix them up and re-tenant them. Owners, meanwhile, want to wait until the fundamentals of the market improve, so they will fetch higher prices, he explained.

And while current owners have little motivation to sell, investors are increasingly looking to buy distressed properties, just like it has been the case with many home buyers.

“The new clients are going to be the lenders,” Devereaux said. And while most of the income-producing properties that have been sold by lenders so far have been B and C properties – that is, older, less-well-located buildings than Class A – it is only a matter of time before some trophy buildings are sold by lenders, he said.

“Lenders will stop amending loans and delaying foreclosures, resulting in a surplus of assets on lenders’ books,” Devereaux said. “The number of distressed assets for sale will increase in 2010. It will not be a flood of product, but the cycle will last for years.”

Devereaux said the perception among would-be buyers it that they will get better deals, once the buildings are in the hands of the lenders. “I’m not sure that is going to be the reality, though,” he said. “There are going to be a lot more people bidding for properties in foreclosure or in a receivership, so the competition may drive up prices.”

The good news, he said, that as with the residential market, Denver seems certain to bounce back quicker than most national markets. The same economic forces drive both residential and commercial markets. Denver did not become as overbuilt as other markets, its unemployment rate is lower than most parts of the country and the national average, and the economy is more diversified than it has been historically.

“Denver will continue to be a preferred market,” Devereaux said.

Contact John Rebchook at JRCHOOK@gmail.com or 303-945-6865.