Denver Market Overview

Denver currently ranks as the worst performing office market in the U.S. 


With office demand remaining flat since the 2nd quarter of 2022, our opinion is the recession has already begun and the impact of this will mean a continued weakening demand for office space. Leasing activity has improved over the last two quarters increase by 11.6% in the 2nd quarter of 2023.  However, this positive indicator is not enough to declare an official recovery, as average deal sizes continues to trend downward. The hybrid workplace environment is here to stay, and each company has its own interpretation of what remote access in office work looks like. Tenants currently in the market for office space are 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 property owners are focusing on common spaces, such as gyms, yoga studios, coffee shops, rooftop terraces, interactive golf simulators, wine/beer tasting bars and game lounges. 

Vacancy & Lease Rates

Leasing activity has increased since the pandemic, but not enough to outpace tenant move outs.  Annual absorption has remained in the red for 3 years now as companies reassess their office footprints.  There is a continued emphasis on migration out of the CBD with office users favoring the Cherry Creek and Platt River submarkets.  Denver's overall office vacancy at the end of 2nd quarter 2023 stands at 15.5%, up almost 1% from the beginning of 2023.  Net absorption for 2nd quarter 2023 came in at a negative 512,000 square feet, a 30% increase from 1st quarter 2023.  Cherry Creek is the only Denver submarket to maintain positive absorption and outperforming rents, due to a high concentration of class A assets with landlords capitalizing on the flight to quality.  Office vacancies are concentrated in older vintage segment of the office market with offices built in the 1980’s and 1990’s mostly impacted.  60% of office vacancy is concentrated in 10% of existing office buildings and 90% of office vacancy is concentrated in only 30% of existing buildings. Tenants are downsizing footprints via densification and choosing properties with more efficient floor plates, enabling companies to take less space but in higher quality buildings.  Denver’s average lease size now stands at 3175 square feet, a 45% decrease from the average lease size at the peak in 2015.  Average asking lease rates have remained flat since the end of 2022 and were at $29.19 per square foot on a full service gross lease at the end of 2nd quarter 2023.  Lease terms remain in the favor of tenants with 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 6.4 million square feet, slightly down from the end of  2022, most likely due to the leases ending rather  than  actually being subleased.  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 20.7%, up 0.7% at the end 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.  The difference between average asking lease rates for direct space versus sublease space has reached $9 per square foot, the widest delta on record.  At the beginning of 2020 the difference was less than $2 per square foot.

New Construction and Outdated Buildings

Development remains active in Denver, as developers continue to take advantage of tenant’s desire for quality office space.  Currently, there are 26 properties totaling 4.1 million square feet of new office buildings underway.  This is an increase from the 19 buildings and 2.1 million under construction at the end of 2022.  Platt River is the most desirable area for office tenants in Denver and is on track to expand its office inventory by over 15%.  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. However, the opportunity to repurpose existing office properties into residential use is inconsequential.  A very small percentage of office properties have the correct floor plate size and infrastructure for consideration, and the costs to convert are enormous.  One study by COSTAR indicates that only about 6% of the office inventory in the U.S. would come off the market due to conversion to residential use.  That would represent only a 2.5% increase (465,000 units) in the current residential inventory.  This amount is dwarfed by the 1.1 million units of multifamily currently under construction in the U.S. and thus unlikely to impact or solve the housing shortage.  It is agreed that we need to redesign our built environment, but the conversion of office to residential is not the answer.  This leaves demolition and redevelopment as the final solution.  


Investment sale activity has taken a step back since the second half of 2022 due to the uncertainty of the future of office demand.  The lack of sale transactions has stalled a much-needed reset in valuations. Vacant value add assets have fallen out of favor as office vacancies continue to climb to record levels.  Market average CAP rates for Denver investment office properties came in at 8.1% since the beginning of 2023.  A 1% increase in the last 6 months. Average sale price of office investment sales came in at  $236 per square foot, a drop of 8.5% since the end of 2022. The Lodo and Cherry Creek submarkets are achieving the highest average sale prices at around $400 per square foot.  Overall, office values have dropped by 25% in the past 12 months.  Estimates show that work habit shifts have destroyed $413 billion of value in the overall U.S. office market, with a majority of that being in the central business districts.  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.



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