Office Properties

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Page 12 — Office Properties Quarterly — July 2015
Market Drivers
by Michelle Z. Askeland
About 97 percent of all Colorado oil
and gas firms are located in down-
town Denver, specifically Lower
Downtown and the central business
district, which makes it natural to
wonder how the decline in crude oil
prices is affecting the office market.
The Denver office market is much
stronger than it was during previ-
ous oil price drops, and the drop is
not predicted to have much, if any,
impact to the overall marketplace.
So far, just under 600,000 square
feet of space is available for sublease
since the price decline, said Tim Har-
rington, executive managing direc-
tor in the Denver Newmark Grubb
Knight Frank office. The overall CBD
market is comprised of about 25.8
million sf, so that space represents
less than 2 percent. This dip has not
affected rental rates. “I think that
there’s a very good chance that it
won’t affect rates,” he said. “I think
that some of these sublease spaces
will get backfilled, and it’s not going
to be as negative an impact as it
once was back in the 1980s.”
The main reason for this outlook
is the diversification of the market.
Today, the oil and gas industry rep-
resents 10,446 jobs in downtown
Denver, and 11 percent of all private-
sector jobs, according the Downtown
Denver Partnership’s Economic
Impact of Downtown Denver Oil
and Gas Industry study. Taking into
account indirect industry firms,
the sector takes up 5.1 million sf of
office space or 22.6 percent of the
total office space downtown.
Back in 1985, when prices dropped
and Denver office vacancy soared,
the industry alone accounted for
about 32 percent of the market,
which made the city vulnerable,
Harrington said. Denver experienced
some of the highest vacancies in
the world at that time, hovering
between 30 and 32 percent. As the
market struggled to recoup, full-ser-
vice office space in brand new, Class
A buildings ranged from $12 to $15
per sf. In the early 1980s, the same
product would be in the $20 range,
he said.
Today, government, financial insti-
tutions, communications, engineer-
ing, legal and accounting sectors
all account for at least 10 percent
of the market makeup. “We’re so
well diversified,” he said. “Denver is
extremely healthy.”
The current vacancy rates are
headed toward 10 percent, said
Bruce Johnson, Cresa managing
principal. By Cresa’s definition, a
healthy vacancy rate is between
10 and 15 percent, in which case
the market is at equilibrium and
it is neither a landlord nor tenant
market. The oil and gas industry
would need to give up an exorbitant
amount of space to swing the vacan-
cy rates past the 15 percent mark.
This available oil and gas sublease
space – which has been put up by
four or five companies – presents
Courtesy Newmark Grubb Knight Frank
Seven different industry sectors each account for at least 10 percent of the Denver market makeup.
Houston. The Houston office mar-
ket, which is comprised of 286 mil-
lion square feet, currently has a
vacancy of 11.6 percent. After expe-
riencing banner years from 2012 to
third-quarter 2014, the city may be
at the tipping point of being a fun-
damentally stable environment to
something less stable in the office
sector, said Brandi McDonald, New-
mark Grubb Knight Frank executive
managing director in the Houston
office. “The true story will come out
in the Q3 and Q4 reports,” she said.
“Companies are not making deci-
sions right now if they don’t have
to,” she said. “It is our prediction
that our fundamentals will begin to
decline severely when Q2 and Q3
numbers come out. And I believe
they’re going to decline into the
first two quarters of 2016. Then we
predict an upturn by the end of 2016
and returning to a more healthy
environment in 2017.”
The city delivered 4.4 million sf
in the first quarter and there is 14.9
million sf still under construction,
said McDonald. The 70-plus pro-
posed buildings will not have a shot
at breaking ground on a speculative
basis until the city records at least
four consecutive quarters of sub-
stantial absorption, she said.
In the 1980s, 85 million sf of office
was delivered, but in the last 30
years, since the 1985 crash, Houston
only built 102 million sf of office.
“We have 11 corporate campuses
under construction now, nine of
which are energy companies,” she
said. “Those 11 corporate campuses
make up over 12 million sf coming
on line,” she said.
In the 1980s, oil and gas made up
80 percent of the office-user sec-
tor in Houston. Today, the industry
makes up 50 percent. “I believe that
we’re not going to see anything
compared to the ’80s because our
demographics have shifted and
we have mature developers who
remember lessons learned,” she
said.
Alberta, Canada. The Alberta office
market consists of roughly 97 mil-
lion sf, and most of the office spaces
are in Calgary and Edmonton. Cal-
gary has roughly 63 million sf of
office, with 41 million sf located
downtown and the rest in suburban
areas, said Agron Miloti, president
and broker of the Calgary Newmark
Grubb Knight Frank office.
New Class A product tends to have
the city’s lowest vacancy rates. Since
the drop in oil prices, Class A build-
ings are reporting 9 percent vacancy
and Class AA buildings are at 7 per-
cent. “The real vacancies we’re see-
ing are in B and C Class buildings,”
he said. “Our C Class buildings are
about 17 percent vacant, so overall
vacancy downtown Calgary is right
now roughly 11 percent.” Miloti says
a healthy market is somewhere
between 7 and 10 percent vacancy.
In Calgary, oil and gas compa-
nies and related service companies
account for roughly 75 percent
of leased space. “So we really do
depend on oil prices being up there,”
he said.
“The strange thing, and the posi-
tive thing for Calgary, is that the
rates have not dropped that much,”
he said. “They’ve dropped roughly
between 8 and 10 percent. So the
landlords are still holding onto the
rates. If prices stay the same, it will
be difficult for them to do that.”
Calgary has about 4 million sf
under construction and about 90
percent of that space is spoken for.
Edmonton’s downtown is much
smaller than Calgary’s, even though
both cities have a population of
about 1.1 million. About 16.7 million
sf is located downtown and 10 mil-
lion sf is located in suburban areas,
totaling roughly 26.7 million sf of
office property.
Edmonton’s economy is more
diverse than Calgary’s economy.
There is a stronger government
presence, which takes up roughly
25 percent of the office space. An
additional 20 percent is used by
other professional sectors. The rest
is made up of oil and gas services
companies, he said.
Courtesy Newmark Grubb Knight Frank
Oil and gas companies and related services account for 75 percent of leased Calgary
office space.