Denver Market Overview

January 2019

Office Market Vacancy Flat for All of 2018
Absorption Still Strong but,
2019 May Be the Downturn Year

Space availability rates changed little throughout 2018 and ended the year with Denver’s office vacancy at 9.4%, down from 9.7% at the end of 3rd quarter 2018.  Net absorption was a positive 1,160,514 square feet of space during 4th quarter 2018, down from 1,279,356 square feet of absorption during 3rd quarter 2018, but still remains strong.  Average asking lease rates for all metro Denver office space continued to increase and ended 2018 at $26.95 per square foot on a full service lease.  This represents a 0.3% increase in lease rates since the end of the 3rd quarter 2018.  The average asking lease rates continue to be driven up by new construction.  Denver’s office market is in its 10th year of expansion, and brand-new premium buildings have exceeded $50 per square foot asking rates, an unprecedented level for Denver.  During  the 4th quarter 2018, Denver had 7 newly constructed office buildings delivered for a total of 649,014 square feet of space.  At the end of 4th quarter 2018 there were new office buildings under construction totaling 4,540,282.

For 2019, some are saying the Denver commercial real estate market will remain strong and more are saying the market will soften.  Expectations for a slower economy, slowing job growth, rising interest rates, and softening demand for office space will have vacancies trending upward, supplies becoming robust, and rent growth easing. All making for more competitive market conditions for landlords.  For right now, tenants with large space requirements will continue to find options limited and mostly within the higher rent and newly constructed properties, but smaller tenants have many options to choose from, as a significant amount of vacant office space in Denver is in suite sizes that are less than 15,000 square feet. These tenants can demand stronger incentives, such as more free rent, increased tenant finish allowances, moving and cabling allowances, and discounted or free covered parking.  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.

Building owners are continuing to adopt the new BOMA 2017 office measurement standard for leasing office space which allows them to include building amenities and all vertical penetrations into the common area factor calculation. (See our separate article on this subject in our newsletter). This combined with market lease rate increases and ongoing increases in the cost to operate buildings has some companies seeing rental rate increases by as much as 30% for their current space.  If you are looking to control occupancy expenses, you have three basic options to consider:  1)  Densify: decrease your 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: look at class B and C properties in the same geography which offer a lower price point on lease rate and thus you can maintain the space size needed.   3) Change geography:  look at relocating slightly outside the most popular office submarkets. The bottom line is that office tenants coming to the end of their current lease do not have to accept these price hikes.

2019 will undoubtedly be the tell tale year as to if a market correction is going to happen.  In the meantime, 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 and gain the market knowledge on what other tenants have obtained for lease rates, tenant finish allowances, free rent, and other incentives.  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 2019