Denver Market Overview

January 2018

Office Market Flat for 2018, Continued Deceleration in Net Absorption, Occupancy and Rate Increases

2017 ended the year with Denver’s office vacancy increasing to 10.5%  for a total increase of approximately 1/2% for 2017. Net absorption was a positive 32,956 square feet of space during 4th quarter 2017, significantly down from the 257,755 square feet of absorption during 3rd quarter 2017.  The amount of sublease space on the market in metro Denver continued to increase and ended 2017 at 1,906,860 square feet of space.   Average asking lease rates for all metro Denver office space continued to increase and ended 2017 at $26.32 per square foot on a full service lease.  This represents a 1.3% increase in lease rates in just the 3rd quarter of 2017.

For 4th quarter 2017, Denver had 11 newly constructed office buildings deliver for a total of  482,174 square feet of space.    Not all of these buildings were fully leased at time of delivery.  Space that is not leased when a new building delivers is then counted as new market vacancy.  At the end of 2017 there were new office buildings under construction totaling 5,233,168 square feet, all scheduled for delivery in 2018.  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.  Newly constructed office space in Denver is leasing up very well and at historically high lease rates.  Older buildings that lack amenities and the infrastructure for evolving technologies could begin to struggle to retain and attract new tenants.

Tenants with large space requirements will continue to find options limited and mostly within the higher rent properties.  Smaller tenants under 15,000 square feet will have many options to choose from. For small tenants we are seeing an increase in incentives such as more free rent or tenant finish allowances, especially in class B and C quality office space. Asking lease rates however have not yet softened.  In fact, the rise in lease rates in the CBD is pricing out many businesses and forcing them to seek out lower cost alternatives in the suburbs.  Job creation is expected to continue demand for office space, but with the significant new construction, the office market vacancy and rent growth is expected to be flat in 2018. 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 January 2018