Page 10B —
COLORADO REAL ESTATE JOURNAL
— September 21-October 4, 2016
Spotlight
he expansion of the
Denver office market
continued into the
second quarter of
2016, which marked the 26th
consecutive quarter of positive
net absorption. Vacancy has
stabilized at 13.7 percent, rep-
resenting a drop of more than
600 basis points from its peak
at year-end 2009, while total
net absorption has topped 8.4
million square feet and rental
rates in core submarkets have
reached historical highs. Net
absorption for second-quarter
2016 totaled 284,330 sf,
and year-to-date absorption
reached 538,157 sf.
Occupancy in the central
business district (CBD) sub-
market contracted slightly in
second-quarter 2016, driven by
downsizing among oil and gas
firms totaling approximately
93,000 sf and a corporate relo-
cation. The CBD posted quar-
terly net absorption of negative
93,959 sf, but year-to-date
absorption remained positive
at 81,254 sf. Vacancy increased
to 14.2 percent from 13.9 per-
cent in the previous quarter
and year-over-year from 12.8
percent.
In the face of low oil prices
and global oversupply, Denver
has shown resilience due to its
diverse tenant mix. Downsizing
and closures by oil and gas
firms has accounted for close to
760,000 sf of negative absorp-
tion over the past six quarters,
but these losses were almost
entirely offset by growth in
other industry sectors, leaving
the CBD with flat absorption.
Though the oil and gas situa-
tion likely will get worse before
it gets better, significant move-
ins by Prologis, DaVita and
Antero Resources will drive
positive absorption of more
than 500,000 sf in the next
three to 12 months.
The northwest (NW) submar-
ket saw a continuation of the
strong performances posted
in 2014 and
2015, driven
by organic
growth.
Vacancy fell
to 11.4 per-
cent, the low-
est level since
2000, and
now is lower
than that of
the CBD or
southeast
suburban
(SES).
Quarterly
net absorp-
tion was
64,538 sf, bringing year-to-date
absorption to 100,966 sf. This
momentum is forecast to con-
tinue throughout 2016, driven
by continued growth in the
technology sector, which has
strong roots in the NW, and
new tenants in diverse indus-
tries attracted to the location
and quality of life. This growth
is fueling a housing boom,
which will further enhance the
draw of the area.
Having weathered the storm
of corporate downsizing in
2015, the SES posted positive
absorption in the first half
of 2016, driven by corporate
expansion. The SES ended the
second quarter with the mar-
ket’s strongest performance,
logging quarterly net absorp-
tion of 147,161 sf and year-to-
date absorption of 198,772 sf.
Vacancy decreased to 14.3
percent from 14.5 percent in
the previous quarter but was
up year-over-year from 13.5
percent. The Class A sector
was responsible for the major-
ity of the submarket’s absorp-
tion, with quarterly and year-
to-date absorption of 140,128
sf and 168,197 sf, respec-
tively. The SES is expected to
hold steady in 2016, buoyed
by continued organic growth
in financial services, profes-
sional and business services,
telecom, health care and
home-building-related sectors.
Direct asking rates increased
year-over-year in all submar-
kets, and rates in the core
submarkets continued to reach
record highs. In the CBD, Class
A rates rose 29.3 percent from
year-end 2009 to $36.85 per
sf, and Class B rates increased
28.9 percent to $29 per sf.
These rates continue to set
records for all-time highs. Class
A rates in some new buildings,
propelled upward by property
tax increases, have breached
$50 per sf, a level never before
seen in Denver. SES Class A
rates stood at $26.50 per sf
and have eclipsed the previous
cycle’s peak recorded at the
fourth quarter of 2008. Class B
rates were $22.35 per sf, which
beats the previous high record-
ed in 2008 and represents a
35.5 percent increase from
the cycle’s low of $16.50 per sf
recorded in 2009/2010.
In second-quarter 2016, sales
totaled 2.1 million sf valued at
$304.0 million, bringing year-
to-date totals to 5.2 million sf
for a total of $900 million. In
Denver’s red-hot investment
arena, now considered a top-
tier market, activity remains
strong, but with the exception
of core assets, pricing and
cap rates on all other product
classes are showing signs of
flattening. During the second
quarter, the office market saw
significant suburban sale activ-
ity and repricing of older Class
A office towers, particularly in
the northern part of the Denver
Tech Center, with this category
of buildings selling below or at
approximately equal pricing
from 10 years ago. This pric-
ing reflects the large capital
improvements needed for these
aging buildings despite excel-
lent locations.
Denver’s strong economy and
market fundamentals have
supported a development win-
dow for the past several years,
spurring the return of specula-
tive development. Sixteen proj-
ects totaling 3.5 million sf cur-
rently are under construction
or renovation. Although most of
the projects in the construction
pipeline are speculative, devel-
opers are still proceeding in a
disciplined manner. Current
new projects are either heav-
ily preleased or, if speculative,
confined to high-demand, niche
markets and transit-oriented
development (TOD) locations.
The future looks bright
for Denver’s economy and
office market. The University
of Colorado’s Leeds School
of Business forecasts that
Colorado will gain 65,100 jobs
and 95,000 residents in 2016.
The professional and business
services sector, one of the top
office-occupying industry sec-
tors, is projected to grow by
a robust 4.3 percent in 2016,
adding 15,000 jobs. Denver was
ranked sixth among U.S. mar-
kets to watch in 2016 in the
prestigious Emerging Trends in
Real Estate report, which cited
its quality of life, culture, grow-
ing concentration of technology
firms, strong local economy and
investment in public and pri-
vate infrastructure, all of which
will foster sustainable growth.
It is not surprising that Denver
is one of the fastest growing
metro areas, ranked seventh
for population growth from
2014 to 2015.
Lauren
Douglas
Director of Research
Newmark Grubb
Knight Frank
T
and population growth also
has brought its share of chal-
lenges to downtown. Those of
us who work or live in down-
town Denver recognize the
issues facing the city with our
proliferating homelessness
and transient population. A
number of blocks within the
16th Street Mall have become
an eyesore. It is a challenge
in major cities to care for the
homeless and Denver is no
exception.
Yet an even greater chal-
lenge has been to control and
enforce safety, littering and
sanitation. Many homeless
appear to be able-bodied and
find downtown Denver to be
a very comfortable and enjoy-
able area with a mild climate
that can sustain their lifestyle.
Fortunately, the city has rec-
ognized many of these issues
and is taking measures to
mitigate the crime and lack
of cleanliness that has come
along with the advancements
in downtown Denver.
Downtown Denver’s future
looks bright. On the heels of
over $5 billion of development
projects downtown over the
last five years that include
over 5,500 residential units,
3 million sf of office space
and 26 hotels; we have an
additional $2.5 billion in total
investments under construc-
tion and planned that include
1,200 hotel rooms, 4,600 addi-
tional residential units and
another 2.6 million sf of office
space.
Downtown Denver has
become one of the hottest cen-
ter cities in the United States.
In the last two years, Denver
has been ranked by numer-
ous publications as “best-in-
class” for business, careers,
livability, economic growth,
entrepreneurs, technology and
housing. Downtown Denver
has become a “model” down-
town with many cites wishing
to emulate. An idea and plan
that started in 1986 by some
very forward-thinking individ-
uals in a time of crisis changed
downtown Denver forever.
Downtown
1900 16th Street
