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Mark Jeffries in Colorado Real Estate Journal: The State of Office Financing in the Denver Market

Lease rates continue to go higher, the speculative office development increases and overall office vacancy continued to decrease in the first half of 2019. Record unemployment below the national average, along with steady job growth, has put metro Denver in the upper tier of targeted U.S. markets for investors, lenders and developers.

Political and economic factors have led to a rising interest rate environment over the past couple of years, but a trade war has led to a free-fall in Treasuries and other indexes, bringing the cost of borrowing significantly down. Interest rates have helped spur investment and transaction activity, aided by continued headquarters relocations and expansion of the technology sector.

While the massive rent growth we’d seen over the past seven years appeared to be stabilizing at the end of 2018, asking lease rates for office ticked up by 2.8% at the end of the second quarter. Rent concessions and tenant improvements had increased late last year, but positive absorption and decreased vacancy in the first half of the year have leveled them off.

Of the over 450,000 office sq. ft. absorbed in Q2, over 185,000 sq. ft. of that was in the central business district. RiNo, the northwest submarket and the southeast submarket also saw strong gains in Q2. This trend shows no sign of slowing for the remainder of the year. The improved rents, absorption and vacancy factors in the suburban office submarkets have made lending there more attractive than in the years following the recession, and factors like near term rollover are not as troubling as they have been historically.

With the immense growth and diversification of the Denver economy this cycle, the metro area has become much more of a primary market for national and global sources of capital investment.

Interest rates had steadily risen through the end of 2018, creating concern around rising cap rates as well as slowed investment and transaction activity. Then, as very few people expected, U.S. Treasuries and other indexes plummeted through midyear. This, in particular, has brought long-term interest rates to near record lows.

Strong economic conditions, rising rents and improved occupancy factors combined with low costs of debt have spurred office investment activity in Denver and across the country. Investor demand and transaction volume seemed to dip in the first half of 2018, but ramped back up later in the year. One reason for this may be tax reform, the newly created opportunity zones and the new 20% deduction on pass-through entities.

In addition to a more favorable tax environment, interest rates falling through the floor have made for a very favorable environment for investors. What appeared to be a rising interest rate environment at the end of 2018 has turned into an outlook of stable, low rates for the foreseeable future. Caps on floating rate debt are significantly less expensive than they were in 2018, and with the Fed deciding to cut rates, it seems like we’ll be in this environment for at least the time being.

Leasing activity in the tech/software industry has been among the biggest drivers in the Denver office market in the first half of the year. Occupancy costs and cost-of-living advantages over the West Coast are likely to remain drivers for tech relocation to Denver. SwitchFly, Strava, Xero, Opentable and Marketo are among tech companies that have leased space in the Denver market recently.

The trend of oil and gas, health care and tech headquarters relocation activity in Denver during this expansion period looks to continue for the foreseeable future as well. VF Corp., the parent company of The North Face, Dickies and Lee jeans, is bringing over 800 new jobs to Denver.

In recent years, many have expressed doubts about the future of the office market because of the rise in coworking space and more employees working remotely. As the attractiveness the Denver market has to out-of-state and international companies continues, this does not appear to be an issue in Denver nearly as much as it does for other cities.

Another concern is the 2.3 million sq. ft. of speculative office space under construction in metro Denver. The strong fundamentals of the market, combined with projected office demand, are enough going into 2020 to keep lenders optimistic for Denver.

Denver’s office market will continue to be attractive to capital sources for the remainder of 2019 due to the low cost of borrowing, a strong local economy, job growth and office market factors.

Cap rates, which seemed to be on the rise last year, have leveled off and will see some compression with interest rates falling like they have. Interest rates look as if they will stay in this near-record low territory for the foreseeable future. Headquarters relocations and the expansion of the tech sector look to be only increasing and help to balance the strong levels of office space delivery continuing in Denver.

The story appeared in the Colorado Real Estate Journal.

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Mark Jeffries featured in Colorado Real Estate Journal

The state of office financing in the Denver market

Lease rates continue to go higher, the speculative office development increases and overall office vacancy continued to decrease in the first half of 2019. Record unemployment below the national average, along with steady job growth, has put metro Denver in the upper tier of targeted U.S. markets for investors, lenders and developers.

Political and economic factors have led to a rising interest rate environment over the past couple of years, but a trade war has led to a free-fall in Treasuries and other indexes, bringing the cost of borrowing significantly down. Interest rates have helped spur investment and transaction activity, aided by continued headquarters relocations and expansion of the technology sector.

While the massive rent growth we’d seen over the past seven years appeared to be stabilizing at the end of 2018, asking lease rates for office ticked up by 2.8% at the end of the second quarter. Rent concessions and tenant improvements had increased late last year, but positive absorption and decreased vacancy in the first half of the year have leveled them off.

Check out how strong market fundamentals, along with projected office demand, are making Denver lenders optimistic.

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Denver apartments: Climate change or just weather?

Planning is paramount in developing strategic initiatives, increasing flexibility and reducing risk across all businesses and industries, including multifamily. As we pass the midyear milestone, reflecting on the multifamily market is a worthwhile endeavor for all developers, investors and lenders as they plan their next moves. With this in mind, our multifamily discussion will focus on key data trends, regulatory environment headwinds and capital market considerations as we officially enter the longest economic expansion in U.S. history.

It is no secret that as an asset class multifamily performance has outperformed expectations. In assessing current metro Denver data you might even get the sense that there is still room to run. For instance, according to the Cary Brueteig’s Apartment Insights Second Quarter 2019 Report, vacancy decreased by 80 basis points to 5.23 percent, positive absorption tallied 3,670 units, and rents rose 4 percent, surpassing $1,500 per unit ($1.75 per square foot).

All this while Denver continues staggering levels of multifamily development activity, evident by the full year 2019 projected delivery pace of over 16,000 units across more than 80 projects. Reviewing submarket activity, the Denver central business district has over 5,000 units currently under construction, roughly 120 percent more than the next most active submarket. However, development is truly widespread as 10 submarkets currently register over 1,000 units under construction.

Fears of oversupply are always valid, especially when metro Denver’s total pipeline of units under construction exceeds 27,500 units. With Federal Reserve Chairman Jerome Powell signaling dovish monetary policy moves, multifamily developers and investors are pushing forth. The expectations have been set that our low capital-cost environment will remain. Furthermore, the expectations are that the sheer volume of capital that exists today in the multifamily sector will remain, thereby softening any landing experienced by local imbalance of supply/demand. These expectations do have merits, but they also could be labeled as just assumptions, which sounds more slippery.

Beyond unknowns of capital availability and interest rates, our multifamily regulatory environment provides another layer of uncertainty. Agency reform of Fannie Mae and Freddie Mac, rent restrictions and capped-growth initiatives are all issues playing out in Washington, D.C., and throughout various local municipalities.

Mark Calabria, director of the Federal Housing Finance Agency, is expected to propose a structure to exit from conservatorship of the government sponsored enterprises of Fannie Mae and Freddie Mac. Recent reports indicate that the privatization proposal could come as early as September. Anytime you have market players that combine for $143 billion in multifamily origination volume, as Fannie Mae and Freddie Mac did last year, a potential disruption to this market liquidity will have consequences.

While agency reform is inevitable, actual implementation of a congressionally approved privatization proposal won’t happen overnight. Privatization allows taxpayer exposure to be reduced, but without the implicit guarantee of the federal government, bond investors will require a premium on spread to compensate for the additional perceived risk.

In a legal sense, the GSEs are quasi-private corporations chartered by Congress and with private shareholders. These private shareholders also have their own interests to protect, and would resist any sort of secondary public offering, which would dilute their share value. When balancing these inherent competing interests, you need to have a seat at the table. Thankfully, via the Mortgage Bankers Association, the real estate finance industry is able to maximize political strength and send a strong, collective and clear message on behalf of our industry to key policymakers.

Until the puzzle pieces of agency reform are known, confidence should remain in the multifamily capital markets as the cost of capital appears to be on the unbelievable path of getting cheaper. The 25 basis point Fed Funds rate cut and expected additional fund rate cuts prior to year end will continue to put downward pressure on short term rates. At the time of submission, the yield curve between the 10-year U.S. Treasury and the three-month Libor was already inverted, so long-term, fixed-rate debt is still very attractive, and quite frankly could become even more attractive as global economic weakness persists, pressuring the 10 UST yield down even further as a safe haven for bond investors.

How far can short term rates drop? Well, as shown the in the graph, the one-month Libor futures indicates massive downward pressure, with projections reflecting a nearly 90 basis point-drop in the one-month Libor from current range of 2.3 percent, all occurring within the next 19 months. Again, this is primarily due to global economic weakness. The awareness that “real estate is local, capital is global” has never been more evident than within our current environment, as we constantly need to weigh local multifamily trends independently of the capital markets indications. Each are measuring sticks, but the compasses are not tied.

As we reflect on midyear progress and plan for future achievements, we are fortunate that the metro Denver multifamily market has defied skeptics with continued performance strength. Don’t be surprised if this continues as capital costs for the foreseeable future are projected to sink further, extending our local rally. Beware though of the disruptive forces from upcoming regulatory changes and the interconnections and ramifications that a weakening global economy can have on our local cost of capital.

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Denver Q2 Multifamily Market Report: Vacancy Improves Even as New Construction Accelerates

Highlights:

Q2 2019 Denver Market Snapshot
  • The second quarter was a very active period in the Denver multifamily market. Developers delivered thousands of new units, but the vacancy rate dipped and rents rose.
  • The vacancy rate fell 80 basis points in the second quarter, dipping to 5.2 percent. The current rate is identical to one year ago.
  • Asking rents ended the second quarter at $1,512 per month, up 4 percent from one year ago. Rent gains have been strongest in the Class B segment.
  • Sales activity thus far in 2019 has been less active than in recent years. Cap rates have remained flat, averaging approximately 5 percent. Pricing has been uneven, spiking in the first quarter before dipping during the second quarter.

Download the report

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Denver Q1 Multifamily Market Report: After Several Strong Years, a Slower Start to 2019

Highlights:

1Q Denver market indicators
  • The Denver multifamily market got off to a slower start to 2019 than has been recorded in recent years. The vacancy rate inched higher even as the pace of new construction cooled. Rents continued on an upward trajectory, although the pace of gains has slowed in Class A apartments.
  • Apartment vacancy in Denver crept up 10 basis points in the first quarter to 6 percent. The rate is 20 basis points higher than one year ago. Vacancy last reached 6 percent in early 2017.
  • Asking rents rose 1.4 percent in the first quarter, and at $1,468 per month are up 4.5 percent year over year. Recent rent increases have been strongest in Class B and Class C properties.
  • Sales activity slowed during the first quarter, but the median price rose as transaction velocity gained momentum in newer buildings. Cap rates ticked higher to average 5.1 percent.

Download the full report

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Greg Benjamin celebrates 25 years with the company

Greg Benjamin in our Denver office celebrates 25 years with the company this week. Thanks for being part of the team, Greg!

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David Link featured in Commercial Property Executive: Could Lending Plateau in 2019?

David Link, managing director of NorthMarq’s Denver regional office, contributed his insight to an article in Commercial Property Executive titled, “Could Lending Plateau in 2019?” With lenders charting record-breaking activity across property types and markets, the article notes that escalating asset prices, rising interest rates and regulatory shifts could force adjustments in 2019.

A bright spot in the forecast continues to be the multifamily market. Life companies in particular were bullish on apartments, making them the most active lender (behind the government agencies) as well as a prominent player in the multifamily bridge loan market.

“The bridge lending space is already (very) active and a pretty saturated group,” said Link. But what distinguishes life companies is that their strategy will continue to focus on “competing for higher-quality assets and pricing their money accordingly,” Link continued.

Read the full article here.

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NorthMarq ranked in Top 5 of The Denver Business Journal’s Denver-Area Commercial Mortgage Companies listing

NorthMarq’s Denver-based regional office, led by senior vice president/managing director David Link, was ranked fifth in The Denver Business Journal’s list of top Denver-Area Commercial Mortgage Companies. The list was based upon dollar volume of Colorado commercial loans closed in 2017.

See the report here.

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Congratulations to David Link and Nancy Ferrell for being recognized as REForum’s 2018 Rainmakers!

Nancy Ferrell, senior vice president/managing director of NorthMarq Capital’s Baltimore office and David Link, senior vice president/managing director of NorthMarq Capital’s Denver office, were recognized in the May edition of Real Estate Forum’s annual Rainmakers feature. This is the fourth consecutive year that a NorthMarq producer has been featured in the Rainmaker listing, with this year being the first in which two company leaders have been chosen.

See the Rainmaker Award for David and Nancy!

Collectively, the 30 finalists completed nearly 2,000 originations last year, accounting for more than $37 billion in debt and equity financing volume.

To earn the title of Rainmaker, each submission received a score for two fields—the total number of transactions and the total volume of all transactions. The final score was based on the sum of the two fields, with the dollar volume serving as the tiebreaker. All transaction were completed between January 1, 2017, and December 31, 2017, and Real Estate Forum verified the authenticity of the submitted deal information.

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Brian Fisher featured in CREJ’s Multifamily Properties Quarterly February issue

Much has been written about the strength of the Denver apartment market and the near historically low interest rates available for nonrecourse loans (loans without a personal guarantee) on larger apartment properties. Since banks, which generally require a personal guarantee, historically have dominated financing smaller apartment properties (those with approximately 100 units or less) less attention has been paid to available nonrecourse options.

Recently, very attractive nonrecourse options became available for smaller properties. Previously offered only on larger transactions, these options provide competitive rates and terms, such as the lack of personal guarantee, extended interest-only periods and leverage up to 80 percent of value. For owners looking to acquire or refinance smaller multifamily properties, there have never been more options. This article provides a brief description of the key characteristics of nonrecourse loans for smaller apartment properties. Continue reading…

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NorthMarq Capital recognizes its Analysts of the Year

MINNEAPOLIS (October 19, 2017) – Marki Shalloe, of NorthMarq Capital’s Atlanta office, and Brian Fisher, of NorthMarq Capital’s Denver office, have been named 2017 Analysts of the Year. The award was presented by NorthMarq CEO Eduardo Padilla at the company’s Analyst Conference in New Orleans held September 24-26. The award is presented to individuals who consistently provide timely, quality service that contributes to the long-term success of the company, display integrity and fairness, and are respected among coworkers and clients.

Brian Fisher was nominated for his incredible efforts over the last 12 months, during which he closed 24 transactions totaling over $562 million in debt/equity. The transactions were funded through numerous lending sources for NorthMarq, including Fannie Mae and Freddie Mac (including six through their Green programs), correspondent life companies, local banks, credit unions and private equity sources. Fisher is described by his team and managers as “being easy to get along with and understanding that clients need accurate work produced in a timely manner—all while developing a rapport with clients.”

Marki Shalloe received her nomination in recognition of her numerous personal attributes and contributions. Shalloe is an employee who deeply cares about the company and its success. She is the epitome of enthusiasm and is a consummate team player, doing whatever needs to be done—from small office tasks, to “burning the midnight oil” to get a loan package out. Without hesitation, Shalloe will volunteer for projects and initiatives, and she continuously offers ideas for improving processes. Shalloe is extremely respected by her associates in the office, as well as the company’s borrower clients and lenders. The producers she works with trust her implicitly to handle due diligence and the closing process, and clients trust her as they know she is representing their interests.

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Mandi Koelling joins NorthMarq Capital’s Denver office as investment analyst

DENVER (October 9, 2017) – NorthMarq Capital, a leader in financing commercial real estate throughout the United States, announced today that Mandi Koelling has joined its Denver regional office in the role of investment analyst.

In her new role at NorthMarq, Koelling will work to fulfill clients’ commercial property needs by assisting in arranging debt and equity for multifamily, office, retail and other specialized product types. She is responsible for the underwriting, marketing and closing of commercial real estate loans. Koelling has been involved in the commercial real estate industry since 2010, where she began her career in property management at CBRE. Prior to her role at NorthMarq Capital, Koelling was a transaction manager for an investment brokerage team at Newmark Knight Frank, specializing in deal execution, financial analysis, market research and the marketing of over $760 million in commercial real estate transactions.

“We couldn’t be more excited to have Mandi join our team,” said David Link, senior vice president/managing director based in NorthMarq’s Denver office. “Having already established herself as a well-known industry professional, we look forward to Mandi hitting the ground running—all to the benefit of our company and clients.”

Koelling obtained a bachelor’s degree in Corporate Finance from Colorado State University and is a licensed Real Estate Broker in the State of Colorado. She is active in NAIOP Colorado and involved in several different committees within the chapter.

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Doug Westfall featured in Real Estate Forum Affordable Housing Q & A

Doug Westfall, senior vice president of NorthMarq Capital’s Denver-based regional office, answered questions in Real Estate Forum’s recent Q&A titled: Affordable as an Investment. In the article, Westfall (and other experts) respond to such questions as “What makes affordable housing an attractive investment niche/asset class for investors?” and “Which markets are you targeting for affordable and workforce housing investment in 2017 and beyond?” Read the full story here.

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David Link delivers Fannie Mae update in NorthMarq’s Market News

Click image to download PDF

Click image to download PDF

High Times in Colorado for Fannie Mae

Fannie Mae continues to view Colorado as positive. Growth trends in population and employment are fueling the appetite for product within Fannie Mae. Over the past two years I’ve heard lenders discuss overbuilding concerns in Denver. While some may consider Denver as having pockets of oversupply, Fannie Mae has no programmatic limitations for any part of the Denver metro area. The same can’t be said for areas in Las Vegas or cities largely driven by the energy sector. Outside of Colorado, Fannie Mae has concerns (as do other lenders) over their supply exposure in certain markets and is regularly taking the temperature of the economic drivers in the market.

Read the full newsletter here…

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NorthMarq Capital promotes David Link to managing director of Denver Office

DENVER (July 21, 2014) – David Link has been promoted to managing director in NorthMarq Capital’s Denver office. In his new position, Link will manage borrowing and lending relationships for the office and direct the execution of equity and debt solutions for commercial real estate transactions. His clients will benefit from over a decade of experience as a producer at NorthMarq, during which he has closed equity and debt transactions with a total capitalized value in excess of $1.5 billion.

Prior to joining NorthMarq in 2003, Link worked in in the Colorado real estate industry for several years specializing in equity and debt arrangement through a regional mortgage banking firm.

Link is a licensed real estate broker in Colorado and is active in numerous Colorado real estate organizations. He holds an undergraduate degree in accounting from the University of Wisconsin and obtained his graduate degree in real estate from the University of Denver.

“David has consistently demonstrated his leadership skills as a team builder over his career at NorthMarq,” said Stephen Bye, managing director of NorthMarq Capital’s Denver based regional office. “From a production prospective, he has arranged many complicated debt and equity transactions on traditional property types, as well as sector areas such as data centers and ski resorts.”

About NorthMarq Capital
NorthMarq Capital, the largest privately held commercial real estate financial intermediary in the U.S., provides mortgage banking and commercial loan servicing in 34 offices coast to coast. With more than $10 billion in annual production volume and servicing a loan portfolio of more than $42 billion, the company offers expertise to borrowers of all size. The company has a long track record of multi-family financing as a Freddie Mac Program Plus™ Seller-Servicer, and through its affiliation with Fannie Mae DUS lender AmeriSphere Multifamily Finance. In addition, NorthMarq has long loan production and loan servicing relationships with more than 50 life companies, many CMBS platforms and hundreds of local, regional and national banks. For more information, please visit northmarqcap.wpengine.com.

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