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— Office Properties Quarterly — March 2016
Market Update
I
n 2015, the Denver office mar-
ket continued a six-year trend
of solid positive net absorption,
the longest run since the 1990s.
During this extended period
of expansion, vacancy fell from 20
percent to stabilize at 14.2 percent,
total net absorption topped 7.8 mil-
lion square feet, and rental rates in
core submarkets
launched a trajec-
tory that achieved
historical highs.
However, the
market did come
up against some
headwinds during
2015. Closures and
downsizing in the
oil and gas sector
accounted for more
than 570,000 sf of
negative absorp-
tion in the central
business district
submarket. Despite concerns, the
CBD’s strength and diversity insulated
it against catastrophic losses, and the
submarket finished the year flat. The
southeast suburban submarket was
challenged by corporate downsizings
but still ended the year in the black.
All the other submarkets, except
the southwest, logged solid positive
absorption, led by the midtown and
northwest submarkets, with respec-
tive full-year absorption of 279,567 sf
and 272,712 sf. Growth in midtown
was driven by the delivery of strongly
preleased new projects in Cherry
Creek, while organic growth, most
notably by SCL Health, accounted for
the northwest’s strong performance.
Central Business District
The CBD experienced expansion
and contraction during 2015, posting
fourth-quarter absorption of 153,857
sf, the highest of the entire Denver
market, but relatively flat full-year
absorption of negative 71,532 sf.
Downsizing in the oil and gas sec-
tor occurred in each of the last three
quarters. However, oil and gas losses
this quarter were offset by several
large move-ins.
Vacancy decreased to 14.5 percent
from 15 percent in the previous
quarter but increased year-over-
year from 12.5 percent due to net
occupancy loss and the completion
of 1601 Wewatta and the Triangle
Building in the previous quarter.
Both projects delivered empty but
with strong preleasing by ten-
ants scheduled to
occupy through-
out 2016. Asking
rates continue on
the upswing. Class
A rates rose 26.8
percent from year-
end 2009 to $36.15
per sf, and Class B
rates increased 22.4
percent to $28 per
sf. These rates con-
tinue to set records
for all-time highs.
Though the low
price and oversupply
of oil is impacting
the nation’s energy
sector, Denver has
shown resilience
due to its diverse
tenant mix.
“New construc-
tion, all in LoDo, is
holding up well in
the face of oil and
gas headwinds, with
strong preleasing,”
said Jamie Gard,
executive manag-
ing director. “Oil
and gas vacancy is
concentrated in the opposite end
of the CBD’s new construction, in
Skyline and Uptown. Though con-
tinued low oil prices will likely bring
additional oil company moveouts,
the CBD will return to positive
absorption in 2016 and beyond with
significant move-ins from Liberty
Global, Prologis, WeWork, DaVita and
Antero Resources totaling more than
500,000 square feet.”
Southeast Suburban
The SES ended 2014 in the red due
to corporate downsizing and returned
to expansion mode in early 2015,
only to post negative absorption in
the third and fourth quarters. Fourth-
quarter absorption was negative
144,382 sf, but full-year absorption
totaled 121,692 sf. The Class A and
Class B sectors performed as mir-
ror images.The Class A sector posted
quarterly absorption of 175,801 sf and
full-year absorption of 455,856 sf, while
the Class B sector lost occupancy, with
fourth-quarter absorption of negative
342,077 sf and full-year absorption of
negative 360,369 sf.
Occupancy loss in the Class B sector
was driven by corporate downsizing
and by migration from Class B to Class
A assets by CoBank and tw telecom
at year-end 2015.The Class C sector
was flat.Vacancy increased to 14.8 per-
cent from 13.4 percent in the previous
quarter and year-over-year from 14.4
percent. Class A rates stand at $26.50
per sf and have eclipsed the previous
cycle’s peak recorded at the fourth-
quarter 2008. Class B rates are $22
per sf, which beats the previous high
recorded in 2008 and represents a 33.3
percent increase from the cycle’s low
of $16.50 per sf recorded in 2009-2010.
“The SES is expected to be positive
in 2016, with another year of moder-
ate absorption buoyed by continued
organic growth in financial services,
professional and business services,
cable, health care and home-building-
related sectors,” said Gard.
Supply Line and Sales
Denver’s strong economy and mar-
ket fundamentals have supported
a development window for the past
several years, and speculative develop-
ment returned in 2015. As of year-end,
13 office projects, totaling 2.5 million sf,
are under construction or renovation.
This represents the largest develop-
ment pipeline since 2006. Although the
majority of projects in the construction
pipeline are speculative, developers
are still proceeding in a controlled and
disciplined manner. New projects are
either heavily preleased or, if specula-
tive, confined to high-demand, niche
markets and transit-oriented develop-
ment locations.Ten buildings, includ-
ing two owner-user headquarters, were
delivered in 2015.
In fourth-quarter 2015, sales totaled
3.7 million sf valued at $719.2 million,
which propelled Denver’s annual total
office sales to 14 million sf totaling
$2.6 billion.This robust performance
outpaced 2014’s total of 14.3 million sf
valued at $2.3 billion. Denver is now
a top-tier market, attracting national
and international capital.The quarter’s
top sale was the purchase of the new
CoBank headquarters building by a
South Korean investor for $113.5 mil-
lion, or $413 per sf.
“The office investment market in
2015 saw record transaction volume
driven by liquidity, low interest rates
and intense competition among a
crowd of new investors vying for
investment opportunities,” said Dave
Tilton, executive managing director.
“The CBD was the hot submarket with
red hot neighborhoods like LoDo, the
Central PlatteValley and RiNo seeing
the most activity due to rapidly rising
rental rates driven by new office, resi-
dential and retail construction. 2016
will see continued liquidity due to even
lower interest rates and Denver’s popu-
larity among commercial real estate
investors, both institutional and pri-
vate. However, the SES submarket will
see more activity in 2016 with three
new office buildings under construc-
tion and upward pressure on Class A
rental rates with investors betting on
Denver’s prospects for overall growth.”
Outlook
The future looks bright for Denver’s
economy and office market.The Uni-
versity 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 sectors, is projected
to grow by a robust 4.3 percent in 2016,
adding 15,000 jobs.
Denver was ranked sixth among U.S.
markets to watch in 2016 in the pres-
tigious EmergingTrends in Real Estate
report, which cited its quality of life,
culture, growing concentration of tech-
nology firms, strong local economy,
and investment in public and private
infrastructure, all of which will foster
sustainable growth. Newmark Grubb
Knight Frank research forecasts Den-
ver’s momentumwill continue into
2016. Other predictions include:
• Balanced market with strong
absorption in secondary submarkets;
• Rental rate increases;
• TOD in high demand, by employers
and employees, as additional FasTracks
transit stations open;
• Co-working/creative space in
demand as millennials outnumber
baby boomers in the workforce;
• 2015 property tax assessments hit-
ting in 2016 resulting in double-digit
increases in tax expenses;
• Additional company downsizing
as oil prices remain low and hedges
expire, but effect will be muted due to
CBD’s diverse tenant mix; and
• Population gains, continued job
creation, albeit at slower rate than
the previous three years, and falling
unemployment driving continued
expansion in 2016.
s
Lauren Douglas
Director of
research, Newmark
Grubb Knight
Frank, Denver
