Denver Market Overview

January 2017

Impressive Recovery of Commercial Real Estate Starting to Run Out of Steam

Denver’s office vacancy rose to 9.8% amid positive net absorption of 214,582 square feet in 4th quarter 2016.  How is it possible to have the vacancy increase and still have positive absorption you ask?  Because new construction deliveries are not counted until the building is completed.  In 4th quarter 2016, Denver had 9 office buildings deliver for a total of over 421,000 square feet  of new construction completions. Most of these newly constructed buildings were not fully leased at time of delivery.  The  space that is not leased when a new building delivers is then counted as new market vacancy.  We are by no means near the end of new construction.  At the end of 2016 there were 51 new office buildings still under construction in the Denver metro area, representing over 6 million square feet of new office space coming to our market.  Within these 51 new buildings, so far, only 45% of the space has been pre leased.  Denver is seeing its largest amount of new construction in more than 10 years.  The metro Denver commercial real estate market is in a state of transition but still remains healthy despite the market slowing down.  Markets are peaking with robust office building construction, driven by demand from companies that desire better office environments, amenities, access to transportation and identity. It is more likely that Denver’s commercial real estate trend will have a gradual slowdown instead of a crash, with expectations that commercial office vacancy will continue to increase.

The central business district saw negative absorption of over 65,000 square feet in 4th quarter 2016.  This is the 4th quarter in a row that downtown Denver’s vacancies have increased.  Average asking lease rates for all metro Denver office space continue to increase and  now average $25.26 per square foot on a full service lease.  This represents a 1% increase in lease rates since the beginning of 2016.   Denver’s available sublease space is approximately 160% more than typically is on the market.  Currently there is over  $1.5 million square feet  of sublease space available in the Denver metro market.  This is an increase of 44% just in the last 6 months of 2016.

The office market is still difficult for tenants.  Many companies are rolling out of older leases to find they are facing 15% to 40% increases in the lease rates and significant increases in parking costs. Yet, the tenant is being told the market is softening.  So what does a tenant do?   Signing a long term lease with annual increases at the peak of a market may not be in your best interest.  Consider shorter term lease renewals that will allow you to renew again sooner and possibly take advantage of future declining office lease rates in a more vacant market.  Most of the office vacancy in the market is under 10,000 square feet in size. So, as a small tenant you should have many options to choose from, but don’t expect that to make the landlords any softer on their asking lease rates.  Larger and better credit tenants will find landlords offering more aggressive proposals to secure their tenancy in a property, but, there will be less options to choose from.   Be prepared to show strong financial information or expect requests for personal guarantees and increased security deposits.

Free rent, moving allowances, and upgraded tenant finish packages are still out there but limited compared to the past.  Tenants without options to renew must focus on lease renewals more than 1 year in advance of their lease expiration. Larger tenants may have to start the process up to two years in advance.  Retaining an experienced commercial real estate consultant to represent your company is imperative if you want the ability to quickly identify upcoming space options and to have the market knowledge to keep your occupancy costs as low as possible.

Read more of our newsletter here January 2017