frederick ross company

COMPANY INSIGHT

The advantages ofinvesting in apartments

Jeff Hawks, PrincipalApartment Realty AdvisorsA Frederick Ross Company

Volume 9

Number 2

APRIL 2004VIEWC O M M E R C I A L R E A L E S TAT E Q U A R T E R L Y

Last year Black & Decker sold 350,000 drills. Not one of those buyers of the drills wanted the drill. They wanted the hole. Similarly, the goal for real estate investors is not to own real estate, it is to realize the return from the real estate. Investors are finding that apartments offer a number of advantages in meeting that goal.

Apartment investors can usually count on cash flow from day one. Contrast that to other product types that may count heavily on a “buy low - sell high” strategy to realize the bulk of the return. Apartments typically

require less ongoing capital investment. The apartment investor does not pay tenant finish and leasing commissions are usually less than $100 per lease.

Since an apartment lease is rarely longer than 12 months, apartments can respond quicker than other product types when the economy recovers. A great business plan would be to own an office building and ride out the downturn with higher long-term leases and convert your equity into apartments and ride the market back up faster through a multi-family investment.

There can also be financing advantages compared to other product types. Within the last 30 days an apartment investor could borrow between 75 and 80 percent loan to value, and receive non-recourse debt which is amortized over 30 years with a balloon payment in 10 years. This debt

OFFICE MARKET

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New Construction Absorption Vacancy

The Denver office market had a slight downturn through the first quarter of 2004, although pending transactions should help to reverse that trend by midyear. Vacancy inched to 22.93% for the period, up from 22.65% at year-end 2003. Negative absorption of about 83,000 square feet occurred during the quarter as the Denver office market experienced a bit more “settling” in several of its key submarkets. New supply of 198,000 square feet was added to the market over the period. Helping to offset some loss, 174,000 square feet of the new product came online occupied. New office construction has tapered significantly over the past few quarters, as only about 420,000 square feet of supply currently remains in the pipeline. It is worth noting, however, that recent speculative construction that has occurred in the market has seen new supply coming online at relatively high levels of occupancy. Rental rates remain soft market-wide allowing tenants to capitalize on conditions and upgrade offices from Class B and C to preferable Class A spaces. In fact, nearly all of the negative absorption has occurred in the B-and-C-Class properties, while Class A product has outperformed the market. Sublease space continues to be removed from the market as an estimated 150,000 square feet was either absorbed or expired during the period.

The CBD remained stable through the first quarter as vacancy notched down slightly from 18.86% to

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18.75%. With positive absorption of about 26,000 square feet for the period, conditions look optimistic for Denver’s second largest submarket. Market conditions for Denver’s largest sector, the Southeast Suburban, while not as positive for the period, showed stability as vacancy rose only slightly to 26.92% from 26.62% at year-end 2003. Negative absorption of about 85,000 square feet occurred due in large part to Greenwood Corporate Plaza IV losing Resources Trust, a 61,000-square-foot tenant. Consolidation of its real estate commitments has Resources Trust moving to the CBD with its sister company First Trust. No new supply was added to the Southeast Suburban market for the period. Positive gains were again realized in the Northwest sector, marking the sixth consecutive quarter in which improvement was made. Vacancy dipped from 28.14% at year-end 2003 to 27.60%. Absorption for the period was positive as about 55,000 square feet of vacant space was removed from the sector. While no new construction is slated in the immediate future, all signs show significant improvement for a submarket that was almost 35 percent vacant as recently as 21 months ago.

Denver Office Market

Transactions

frederick ross company: phone 303.892.1111 fax 303.892.6338 email info@fross.com www.frederickross.com

PECO II LEASES WAREHOUSE to MESA systems

Mesa Systems, Inc., has signed a 118,000-square-foot lease at 403 S. Airport Boulevard, the Peco II building, Aurora. Meeting corporate objectives, the move to Peco II enabled the moving and storage company to combine three Denver locations into one main warehouse and distribution facility, creating greater business effi ciencies and expanded customer service.

Ross represented both the tenant, Mesa Systems, Inc. (in conjunction with Signature Associates ONCOR International in Detroit), and the landlord, Peco II, Inc., a Galion, Ohio-based manufacturer of communications power systems.

Still available for lease at the Peco II building is 40,000± square feet of offi ce space with abundant parking. The property is also available for sale as an investment opportunity.

Please contact Chris Nordling, Rodney Foster, Marcia Mueller or Steve Miller for additional information.

First Trust INCREASES COMMITTMENTTO DOWNTOWN DENVER

First Trust Corporation has signed a 167,000+-square-foot, ten-year lease renewal and expansion at 717 Seventeenth Street, Johns Manville Plaza, Denver.

The company expanded by 43,000 square feet, representing a 25 percent space increase for First Trust’s downtown address. A consolidation from other First Trust local entities drove the need for expansion, resulting in a net growth to downtown Denver. As one of the nation’s largest trustees and an industry leader to investors and financial advisors, First Trust remains loyal to its location in the heart of Denver’s financial district.

Frederick Ross Company negotiated the lease on behalf of First Trust. For additional information, please contact Phil Ruschmeyer, Nathan Johnson or Bill Maher.

On behalf of its client, Thrivent Financial for Lutherans, a financial services organization located in the heart of Denver’s East I-70 airport market, Frederick Ross Company is pleased to announce the sale of a multi-tenant distribution industrial portfolio totaling 762,324 square feet for $29,000,000.

The portfolio consists of two Denver industrial assets: the Nome Street Industrial Complex, a three-building, 455,250-square-foot property, and the Denver Business Center

warehouse portfolio Sold

Complex, a 307,074-square-foot building. The properties were 93 percent leased at the time of the sale.

Purchased by Denver-based real estate investment management company, Westfield Capital Partners, the properties will become part of an investment partnership known as Westfield Industrial Partners I, LLLP. Frederick Ross Company will continue as leasing agent.

Contact Jeff McClintock for additional information.

opportunities

Mapping the West Side

Frederick Ross Company has been appointed as the exclusive marketing agent for the Propp Realty office listings, located in Denver’s West submarket. The portfolio includes 11 buildings with availabilities ranging from 517 square feet to 40,000 square feet.

West side amenities include nationally-known retail centers, golf courses, and conference venues and quaint neighborhoods surrounded by parks, trails and open space.

Building amenities vary throughout the properties to include fitness centers with showers, impressive atriums, exceptional finishes, extensive glass and outstanding views.

For additional leasing information, please contact Robert Bruce, John Hutto or Jamie Gard.

meridian one

A five-story suburban office building, Meridian One at 9785 S. Maroon Circle, Englewood, overlooks a Jack Nicklaus-designed 18-hole championship golf course, capturing the majestic Rocky Mountains.

Situated in Meridian Business Park, Meridian One is surrounded by companies such as EchoStar, Toyota, CH2M Hill, American National Bank, and Teletech Holdings all operating significant facilities within Meridian Business Park.

The property, owned by CMD and exclusively listed by Frederick Ross Company for lease, boasts a great location with easy access to I-25, C-470 and Lincoln Avenue. Various suites offer elevator and lobby identity, functional layouts and superb western views. Common areas are updated and well designed. The building offers abundant parking. 70,000± square feet (divisible to 582 square feet) is currently available for lease.

Call Jamie Gard or Pete Staab for leasing rates and further information.

Frederick Ross Company is pleased to announce the addition of John M. Hutto as Associate Broker.

With seven years of commercial real estate experience, John represents offi ce landlordsand tenants in the Central Business District, Midtown, and Southeast submarkets.

Investing in ApartmentsContinued from Page 1

is fully assumable and would have a rate as low as 4.95%. There is also interest-only debt, which in some cases is below 4.5% and has five- or seven-year terms. Financing can truly add value and increase returns to apartment investors today.

If apartments are so great, why isn’t everybody buying? For one thing, apartments require a bit of a shift in thinking when it comes to cap rates. Most apartment investments in metro Denver will currently underwrite to a cap rate below a seven and in many cases below a six. While these returns seem low, we must remember that these cap rates are based on current “actual” income, which usually reflects a 25 - 35 percent economic vacancy (so there is upside!).

The current surge in capital looking for real estate returns proves that there are a number of viable ways to invest. Investing in the right apartment properties in the right markets can offer real advantages in meeting real estate investment goals.

m arket trends

717 Seventeenth Street, Suite 2000Denver, Colorado 80202-3323

FREDERICK ROSS COMPANY COMMERCIAL REAL ESTATE SERVICES

SINCE 1888

Denver Retail Market

Denver industrial Market

The Denver retail market remained solid through the first quarter of 2004. The period was marked by the completion of several projects and numerous investment sales. At least 10 sale

Denver’s industrial market continued its slow but steady progress through the first quarter of 2004. Although vacancy increased slightly to 9.10% from 9.01% at year-end 2003, absorption was positive, as about 104,000 square feet was taken off the market during the period. New construction consisting of two buildings totaling 284,800 square feet was added to the market over the period. Both properties came online fully vacant, resulting in the slight upswing in vacancy. The Denver industrial market should see continued improvement in conditions through 2004 as about 1.1 million square feet of new product remains in the pipeline, much of which is already pre-leased.

Driving the positive gains for the period was the industrial warehouse market. Vacancy dropped to 7.04% from its year-end total of 7.10%. Positive absorption of about 121,000 square feet was realized during the quarter accounting for all industrial market-wide absorption for the period. Warehouse properties account for 96 percent of all industrial space currently under construction.

Vacancy in the R&D/flex market jumped slightly from 21.45% at year-end 2003 to a current 21.52%. About 17,000 square feet of negative absorption occurred during the period, as no new product was added to the market to help the cause. Currently, there exists one R&D/flex property under construction totaling 43,000 square feet.

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transactions of significance occurred during the quarter with prices ranging from $2 million to $55.5 million. In addition to a continued abundance of leasing activity, six new retail centers were completed during the quarter totaling 728,227 square feet. This new construction, coupled with several new leases, accounted for about 750,000 square feet of positive absorption during the period. Once again, grocery-anchored large strip centers accounted for the majority of the new product that came online. Vacancy increased slightly for the quarter from 9.34% to 9.36%, attributed only to the fact that some of the new product delivered to the market still had some vacant space for lease. Currently, there remains nearly 1.7 million square feet of under-construction product in the pipeline slated for delivery in 2004.