Are we overbuilt again in Boulder? Not this time

Wow, what a year we’ve had in commercial real estate in the Boulder market for 2015 so far!  Record-setting sale transactions, all sectors of commercial space in short supply, lease rates moving up, and the long-lost sighting of construction cranes now dotting the skyline.

At least twice a day during my workday (and a lot after work) I get asked the question, “Where are we in the current commercial real estate cycle?” That’s a tough one to answer; I thought I’d lost all of my prognostication ability after a very scary 2009-10, But, having gone through about five real estate cycles so far in my career, this one feels different.

If you’ve been paying attention to what’s going on with specific transactions lately, you couldn’t help but be in awe of the Unico/Reynolds sale, or even more recently the Rally Software building trading at $53.2 million (the new bar of $344 per square foot for suburban office). Where is the top of this market? Are we there yet?

According to a recent article in the Wall Street Journal, the office market in the rest of the nation is recovering slowly. Nationally, the vacancy rate is flat at 16.6 percent, and lease rates generally are up a meager 3.2 percent over the last 12-month period.

Interestingly, Seattle, San Francisco and San Jose, Calif., are the super-hot markets.  Denver didn’t make it into the top three. For maybe the first time, I think it’s safe to say that Boulder is now its very own, unique and powerful force in the office and retail sector.

My very informal survey leads me to believe we are up 15 percent to 20 percent in suburban office rents locally, with downtown Boulder leading the charge, potentially up by 20 percent to 25 percent over the last year. Retail seems not quite so hot, but steady, with the prime locations up 7 percent to 10 percent. The rent growth, combined with falling cap rates means asset values are moving north quickly.

How long can it last? On paper, with all of the new office projects being built, it would seem we are becoming overbuilt again – remember 1988?  But it doesn’t feel like we are overbuilding this time. This cycle feels like it has a sound foundation; the demand and need for new space is genuine. Tech growth is roaring through the Boulder market like an F-16 with its afterburner lit. It seems as if the residential real estate market locally has helped shore up the office/retail market in the past. I think that may flip here shortly. Commercial may lead the growth charge over residential for the first time in a long time.

On a very positive note, really good tenants are showing up right now and taking lots of quality office space.  Google, Twitter, Zayo – the list of Class A credit tenants shopping for space and coming to Boulder is amazing. Every day it seems we hear of a new announcement of another great tech company either expanding or moving here in short order.

So back to the original question: How long can the current cycle continue?  My prediction is that I think we are now on “cruise control.”  The office market will expand and we will see continued growth and high demand until at least 2018. The fundamentals for stable growth, expansion and demand appear to have a way to run out.

So, for now, buy as much quality Boulder commercial real estate as you reasonably can. I think this may be the safest and most profitable time to buy commercial in memory. See you in 2018!

Geoffrey Keys is president of Keys Commercial Real Estate in Boulder. He can be reached at 303-447-2700 or via email at keys@keys-commercial.com.

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