Denver Market Overview

As the Denver office market gains clarity, major challenges are ahead, with large amounts of Denver office space probably remaining empty in 2023

Overview

The Denver office market has faced several headwinds from the COVID pandemic, inflation, rising interest rates, and now economic uncertainty with a looming recession,  all of which has made Denver a tenant’s office market. The hybrid workplace environment is here to stay, and each company has its own different interpretation of what remote access in office work looks like. Companies are changing office designs to “we” spaces instead of “me” space, with heavy influence on multiple types of shared and hotel space options with less private offices.  Tenants currently in the market for office space continue to reduce their size footprint and are reluctant to renew leases in older buildings, driving a flight to quality, with strong preference for newly delivered and under construction office buildings.  Amenities are no longer an option, and the most important are connected to social interaction.  Office landlords are focusing on common spaces, such as gyms with personal trainers, yoga studios, coffee shops, rooftop terraces, interactive golf simulators, and game lounges. Tenants are demanding their buildings be healthy environments, with building environmental sustainability ratings.

Vacancy & Lease Rates

Leasing activity improved throughout 2023, but the average lease size continues to trend downward.  There is a continued emphasis on migration out of the CBD with office users favoring the Cherry Creek and Platt River submarkets. Vacancies still continue to remain high as demand for Denver office space remains depressed.   Denver's overall office vacancy at the end of 2022 stood at 14.6%, up 1/10th of 1% from the beginning of 2022.  Net absorption in 2023 came in at a negative 393,000 square feet. Due to Denver’s concentration of tech companies who are more open to remote work, Denver now ranks among the worst performing office markets in the U.S.  Smaller office requirements under 15,000 square feet in size have dominated leasing, with 60% of leases signed in 2022 being less than 15,000 square feet in size.  Average asking lease rates at the end of 2022 for office space decreased by 9 cents to $29.03 per square foot compared to the middle of 2022.  Year over year rent growth has slowed significantly in Denver and has dropped now to 0.7%.  Lease rate pricing remains in the favor of tenants by commanding heavy concessions, such as significant free rent, generous tenant improvement allowances, moving and cabling allowances, and free parking.  However, the tenants have to know what to ask for!  Sublease space inventories are at historic record levels.  Available office sublease space in Denver now totals 6.6 million square feet up from 5.1 million square feet in the middle of 2022.  The amount of sublease space on the market solidifies a continued trend of downsizing or eliminating the need for office space.  The current availability rate of office space in Denver is 20%, up from 18.8% at the middle of 2022.  The difference between the vacancy rate and the availability rate is the sublease space, which is currently not vacant, but is being marketed as available.  The effects of the sublease space are largely felt in the Downtown Denver submarket, where the vast amount of sublease space is listed, however recently a few blocks of 100,000 square feet of space have been put on the market for sublease in the Southeast Suburban Denver market.  Sublease space puts downward pressure on overall lease rates, as these spaces are typically offered at a deep discount relative to direct lease space.  The difference between average direct lease asking rates and average sublease space asking rates reached its widest disparity in 4th quarter 2022 and now stands at $8.00 per square foot!

New Construction and Outdated Buildings

Denver's office construction pipeline has pulled back and is no longer one of the top markets in the U.S.  However, development remains active in Denver as developers continue to take advantage of tenant’s desire for quality.  Currently, there are 19 properties totaling 2.6 million square feet of new office buildings underway, expected to deliver in 2023.  The pandemic has spelled the end for office properties that were already on their last legs.  Finding new uses for these structures will become the focus for obsolete older office buildings. Many cities and ownerships are looking at conversion of these properties, through adaptive reuse, into industrial, storage, or affordable housing. Denver is no different, with numerous applications into the city from owners looking for permits to convert large central business district office buildings to residential use. 

Sales

Office building investment activity slowed during the 2nd half of 2022 with $2.1 billion in sale transactions closed, down from $3.4 billion in 2021.  Vacant value add assets have fallen out of favor as office vacancies continue to climb to record levels.  Market average CAP rates for investment office properties came in at 7.1% for 2022 with an average sale price of $258 per square foot, up 4.5% from the previous year. The Cherry Creek market achieved the highest average sale price at $420 per square foot.  With remote work still defining itself and a looming recession that would further lower demand for office space, U.S. property Values could drop by 20% in 2023.  Tenants of all sizes who desire to lease space should be able to command significant incentives that have not been seen in decades.  Property owners continue to look close at tenant credit and ability to fulfill the lease term.  Tenants with lease renewal options should make sure they have expert advice on market lease rates and not just accept a lease renewal rate proposed by their landlord.  Without a market expert consultant, the tenant has no clue what incentives they may be leaving on the table because they didn’t know to ask.  With the office market in the tenants favor, don’t be fooled into thinking you can secure a lease space on short notice!  You will need significant time to accomplish space design, obtain construction permits, and complete construction of new space.  For most tenants, starting the process 12 months in advance of your lease expiration is appropriate. For large tenants, starting 2 years in advance is necessary.  Identifying upcoming space options and gaining market knowledge on other tenants negotiated lease rates and incentives is necessary to achieve the best economics on your lease decision. Retaining an experienced commercial real estate consultant to represent your company is imperative to navigating our “new normal” and accomplishing your goals.


READ MORE OF OUR NEWSLETTER>>

SHELDON-GOLD REALTY, INC.
Commercial Real Estate Services
9025 E. Kenyon Ave. Suite 100
Denver, CO 80237
303-741-2500    Send Email
Copyright 2023 Sheldon Gold Realty, Inc.
Commercial Real Estate Website Design by ESS Software