Denver Market Overview

Mid Year 2018

Office Market Vacancy Continues Flat for 2018 Demand Still Remains High, But Tenants Don’t Have to Accept the Price Hikes!

Space availability rates show little change as second quarter 2018 ended with Denver’s office vacancy remaining flat at 10.5%. Net absorption was a positive 1,236,318 square feet of space during 2nd quarter 2018, up from 936,100 square feet of absorption during first quarter 2018.  However, the quarterly total leasing volume has fallen for the second quarter in a row. The amount of sublease space on the market in metro Denver decreased slightly and is currently at 1,574,898 square feet of space.   Average asking lease rates for all metro Denver office space continued to increase and ended 2nd quarter 2018 at $26.88 per square foot on a full service lease.  This represents a 1.7% increase in lease rates since the end of first quarter 2017.  The average asking lease rates are being driven up by new construction.  Denver’s office market is entering its 10th year of expansion and brand new premium buildings have exceeded $50 per square foot asking rates, an unprecedented level for Denver.

During 2nd quarter 2018, Denver had 12 newly constructed office buildings delivered for a total of 1,331,212 square feet of space.   This is consistent with past quarters delivery of 10-12 new buildings per quarter.  At the end of 2nd quarter 2018 there were new office buildings under construction totaling 3,886,173 square feet, all scheduled for delivery in 2018.  The amount of square footage under construction has dropped close to 40% since the end of 2017. Transit oriented developments continue to be in high demand. In fact, a recent report found that 71% of Denver’s office space is “transit accessible”, being defined as those building within a 10 minute walk from a subway or commuter rail station.  This puts Denver at the top of the country’s 15 biggest markets for the amount of transit accessible office space.  The robust office building construction is being driven by higher than ever interest in newly constructed office buildings amid demand from companies that desire better office environments, amenities, access to transportation, better connectivity and identity.

Denver’s continued increase in property values is hurting smaller business’s.  Average property values have increased up to 25% in the last few years which results in increased property taxes being passed on to the tenant on top of market rent increases at renewal time. Additionally, the Building Owner and Manager Association  (BOMA) 2017 office measurement standard for leasing has changed and now allows office building owners to include building amenities in the common area factor calculation.  With this change in measurement method a tenant can find that a landlord is increasing the square footage space they pay rent on with no change in the tenants usable square footage of the suite they are in. Tenants looking to control occupancy expenses have three basic options to consider:  1)  Densify: Companies may have to decrease their usable square footage by compacting the amount of space allocated for each employee or by implementing flexible work hours, hoteling concepts or work from home.  2) Downgrade: Tenants in higher class properties can look at class B and C properties in the same geography which offer a lower price point on lease rate and thus the company can maintain the space size needed.  3) Move:  Tenants can look to change the location of their office to a different office submarket that allows them to maintain the same quality of property but in an area that is slightly outside of where they are currently located.  The bottom line is that office tenants coming to the end of their current lease do not have to accept the price hike.  There are many options for a tenant to consider that will reduce occupancy costs while still maintain quality of building, transportation access or closely desired amenities.

Tenants with large space requirements will continue to find options limited and mostly within the higher rent and newly constructed properties.  Smaller tenants have many options to choose from, as a significant amount of the vacant office space in Denver is in suite sizes that are less than 20,000 square feet. However, we are not yet seeing downward pressure on the asking lease rates for the smaller spaces.  We are seeing an increase in incentives.  Such as more free rent, increased tenant finish allowances, moving and cabling allowances, especially in class B and C quality office space.  All tenants, especially ones with stronger credit, should find landlords offering more aggressive proposals to secure their tenancy in a property. Tenants with weak financials should be prepared for requests for personal guarantees and increased security deposits.   With the office market still at a record low vacancy, tenants will find stiff competition for the more desirable properties and space locations within a property.  Thus, tenants without options to renew in their lease should be focusing on their lease decision more than 1 year in advance of their lease expiration. Larger tenants may have to start the process up to two years in advance.  In our current highly competitive market, tenants need the ability to quickly identify upcoming space options, gain the market knowledge on what other tenants have obtained for lease rates, tenant finish allowances,  free rent and numerous other areas of the lease that effect a tenants cost of occupying space. Retaining an experienced commercial real estate consultant to represent your company is imperative to accomplishing this and keeping your companies occupancy costs as low as possible.

Read more of our newsletter here Mid Year 2018