Denver Office Market Insight Report

Demand:

The metro market absorbed over 4 million square feet. This is double 2017 results and is second highest all-time. The record of 5.5 million square feet was set in 2000, when Denver and the rest of the country were in the midst of a technology explosion. Denver’s 2018 absorption ranked fifth nationwide. Denver’s time has come.

Major Leases:

There were several. In downtown, VF Corp leased an entire 285,000 SF building to move its headquarters here. DaVita moved into 16 Chestnut in Platte Valley with a 342,000 SF commitment. Along I-25 South, Charter Communications signed several new leases and became the largest tenant in the corridor. Western Union and Newmont Mining both signed leases at Belleview Station as anchor tenants in two new high rises. 

Rates: 

The average full-service rate for class A and class B spaces combined is $28.00/SF. However, the range is $20 - $60/SF! Class A rates have approached  $60/SF in the new downtown high rises. It is possible to negotiate a $20/SF rate in some class B if your remodel needs are minor. Tenants are caught in a “perfect storm.” Near record demand is driving down supply. Buildings are trading at prices that are at an all-time high.  And rising construction costs are driving tenant improvement costs above landlord-provided allowances. 

Sales:

Prices continue to escalate, and the majority of investment-class buildings have sold over the past several years. A record $742/SF was paid for 1601 Wewatta, a new building in Platte Valley. By way of comparison, 1801 California sold a partial interest at $407/SF. 

Vacancy:

Metro Denver is on the verge of becoming a “Landlord Market.” It might be said that Boulder, Cherry Creek, and the LoDo/Platte Valley markets are already there. We have always maintained that sub-10 percent vacancy represents a landlord market, and today vacancy sits at 10.1 percent. Tenants can expect more and more difficult negotiations in their leases, especially in renewals.

New Development:

There are 34 buildings under construction today, representing a total of 3.9M SF: a one-year supply based on 2018 demand. It seems to us that represents a two-year supply or even longer. We find it hard to project that the torrid pace of demand will continue. Uncertainty with the national economy and rising interest rates are raising the caution flag. Further, Denver’s high cost of housing and tight job market is likely to put the brakes on the considerable in-migration of corporate employers we have seen.

Trends:

Tenants are changing their workplaces at a considerable expense.  Efficiency is a driver in part because of higher rents, but also to drive more collaborative, open space. Relocations are difficult, as landlord allowances often fall short of the cost of a remodel. Co-working space is exploding, and WeWork is reportedly now the largest tenant in downtown Denver. The WeWork leases are counted as absorption. We are watching the impact of lower oil prices, trends in technology industries, and how well the co-work spaces fare. 

Tenant Strategies:

Evaluate your lease situation early and often. Consider subleases as a possible strategy to capture lower rents. Compare the cost of class A and B spaces. Recognize that your space is probably more important than the building itself in terms of driving image, culture and productivity. And of course, talk with Cresa about how to best address your real estate situation today.   

 

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