June 2016 — Office Properties Quarterly —
Page 9
F
rom an office market per-
spective, last year was
characterized by significant
changes in the energy sector,
as the industry grappled with
a sustained depression of global oil
prices.
These conditions led a number of
energy companies to pursue cost-
cutting strategies when it came to
their office space – from subleasing
unneeded space to pursuing new
leases with smaller footprints and
more flexible terms. Leasing activity
from the energy sector has contin-
ued to dip in 2016.
Although there have been a num-
ber of layoffs in the last few years,
the vast majority of energy tenants
continue to pay rent on all of their
space. Whether this trend continues
remains to be seen.
The impact of bankruptcies on the
market thus far has been minimal,
although we believe the effects of
the downturn in the energy industry
have yet to be fully felt in the office
market.
However, with all that said, it is
important to note that the Denver
commercial office space market is
still thriving, and the diversity of our
economy has a lot to do with that.
Our economic diversity is helping
mitigate the impact of the current
energy industry situation on the
overall office market. In fact, with
a few recent exceptions, as energy
companies have vacated or sub-
leased, other industries have been
quick to absorb downtown space.
Although we experienced negative
absorption in the first quarter, we
expect that with a number of expan-
sions and relocations in the works,
we ultimately will
be in the black for
2016.
The Rise of the
Tech Industry
The best example
of an industry tak-
ing advantage of
current market
conditions is the
fast-growing tech
sector. Boulder
has long been
associated with a
strong tech-friendly atmosphere, but
Denver is fast on its heels. Denver
ranked No. 4 nationally on JLL’s list
of cities predicted to be technol-
ogy hotspots in 2015, as measured
by tech economic momentum, tal-
ent pool, startup friendliness, and
market factors such as cost of office
space and housing – a prediction
that certainly came to fruition.
Denver continues to attract a high-
ly educated workforce as demand
for skilled tech employees in the
industry grows. Companies increas-
ingly are looking to central Denver,
including River North, Platte Valley
and Lower Highlands for more tal-
ent, amenities and transportation.
This year, we’ve already seen Boul-
der startup SendGrid, a transactional
email delivery and management
service, relocate to downtown Den-
ver to accommodate growing talent
needs.
Negotiated Terms
Approximately 636,000 square
feet of energy space was put on the
sublease market in 2015, and nearly
20 percent of it was reabsorbed –
mostly to other energy or law firms.
This is due, in large part, to the fact
that the majority of subleases from
the energy sector are heavily private
office.
What we’re seeing now is energy
firms are signing new leases or
renewing with smaller footprints
and shorter, more flexible terms. In
this market, firms can sometimes
(but not always) negotiate options
such as early termination and short-
er lease terms to give themselves
some extra peace of mind, given the
state of the market.
While energy and law firms con-
tinue to seek a more traditional pri-
vate office configuration, we’re see-
ing an increase in open space users
in industries such as tech, health
care and finance. These industries,
along with the traditionally more
creative industries, are forgoing the
traditional private office configura-
tion in favor of more collaborative
models for their office space.
As the millennial generation con-
tinues to enter the workforce, the
effect of their changing workstyle
preferences is beginning to manifest
itself in a more meaningful way. For
example, KPMG, aware of its client
base and talent pool, introduced
one of its high-tech “ignition cen-
ters” in downtown Denver. Instead
of mahogany and offices, an open
floor plan features first-in-class col-
laborative spaces and state-of-the-
art technology to facilitate stronger
teamwork.
Available Deals
As mentioned above, in the first
quarter, we did see a negative net
absorption of office space. We antici-
pate that as more sublease space
is added to the market, downward
pressure on asking rates will begin
to curb the escalation the market is
experiencing.
Even in the current market, there
are below-market deals to be had for
high-credit companies as landlords
and sublandlords will always give
the best terms to the strongest ten-
ants in the market.
The best thing tenants can do right
now is stay informed about what is
happening in the market. There is
no substitute for staying ahead of
your leasing needs.
s
Lindsay Brown
Senior vice
president, JLL,
Denver
Market Drivers
Although we experienced negative absorption in
the first quarter, we expect that with a number
of expansions and relocations in the works, we
ultimately will be in the black for 2016.
