Denver Office Market Report Q1 2021
The Denver office market entered the pandemic on solid footing. The market has benefitted from the in-migration and relocation of companies to the area, particularly from technology companies fleeing expensive office space in the coastal markets. Job and population growth have been robust in the past decade, driving strong absorption gains, rent growth, and development activity in the office market.
But Denver's story of growth has not insulated it from the effects of the coronavirus pandemic, which continues to weigh on the office market as tenants hold off on making long-term decisions amid the uncertain environment. Additionally, oil prices hit all-time lows in April of last year from decreased demand for fuel worldwide, and several energy firms in Denver were forced to file for bankruptcy or conduct layoffs.
Vacancies were already creeping up before the pandemic, but the shock to the local economy only made matters worse, as 1.0 million SF of space was vacated in 21Q1 on top of the 4.0 million SF that was vacated in 2020. In addition to direct space hitting the market, sublet availabilities are also posing a challenge to Denver's office market. Sublease availabilities now total 4.6 million SF, nearly an all- time high in Denver.
Softer demand and a wave of speculative construction delivering in the coming quarters have vacancies rising in the forecast, which will continue to shift leverage back to tenants in the near term.
The immediate aftermath of COVID shutdowns made it more challenging for investors and lenders to underwrite deals. Sales volume in the second quarter of last year fell to Great Recession levels. Transactions have picked up in the last three quarters with investors returning to the market. However, sales activity still remains below the pre-pandemic peak.
Denver's office market is in a period of heightened volatility, but there are reasons to be optimistic about its long-term health. Denver has enjoyed some big wins this year with the relocation and expansion of companies, and the market continues to diversify with the emergence of the tech sector's footprint in the local economy.