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Page 4 — Office Properties Quarterly — June 2017
Market Update
96K SQUARE FEET OF CONTIGUOUS SPACE NOW AVAILABLE
Nick Pavlakovich | 303.813.6438 |
Matt Gautreau | 303.813.6424 |
THE FROM OF
/// Actual photography taken from Republic Plaza
Y ou can’t drive more than
one block in downtown
Denver without your view
being interrupted by a tow-
ering crane. All the new
construction concentrated within
a few square miles – combined
with popular lore that millennials
exclusively prefer urban environ-
ments – is causing many real estate
industry observers to feel less than
bullish about suburban office prod-
uct. However, a report from CBRE
Research released last month found
that the so-called “downfall of the
suburban office sector” might be
highly exaggerated.
The U.S. suburban vacancy rate is
near a prerecession low, according to
the North America Suburban Office
Trends Spring 2017 report.The market
has been tightening since the end of
the Great Recession, benefiting from
improving demand and low overall lev-
els of new supply compared with previ-
ous cycles.
The case in Denver is unique, how-
ever. Although nationally suburban
office construction completions are
down, Denver is tied for the third-most-
active suburban market in terms of
office construction underway, tying
with Seattle and NorthernVirginia. In
fact, Denver represents 6 percent of the
total U.S. suburban office construction
underway across the nation.
Nationally, suburban office construc-
tion completions averaged 29 million
square feet per year in 2015 and 2016,
compared with previous cyclical peaks
of 67 million sf in 2008 and 95 million sf
in 1999. In Denver, however, suburban
developments account for 65 percent
of Denver’s total 5 million sf of office
space currently under construction (as
of first-quarter 2017).
The reason why
development
remains strong in
Denver’s suburbs
is primarily rent
growth. Research
found that the sub-
urban office con-
struction still taking
place is concentrated
in a small number
of leading markets
where rent growth
is strong enough to
justify development.
For example, Den-
ver’s southeast office market recorded
an all-time high overall direct average
asking lease rate in the first quarter,
reaching $24.77 per square foot full-
service gross, up 15.3 percent over the
post-recession quarterly average.
In addition to office rent growth, Den-
ver’s suburbs also are benefitting from
in-migration and the expansion of the
light-rail transit system.
Over 95,000 office-using jobs have
been added to the Denver metro since
2010.The surge in office employment is
projected to continue over the next few
years as Denver offers a high quality of
life and lower cost of living compared
to tier-one office markets.
In terms of transit, last year the
Regional Transportation District opened
the University of Colorado A Line, run-
ning fromUnion Station to Denver
International Airport, and the B line
with service toWestminster. RTD
launched the R line servicing Aurora
earlier in 2017, and the organization
plans to further expand with the open-
ing of the G line toWheat Ridge later
this year. RTD’s FasTracks program also
has proposed plans for future service to
areas includingThornton, Broomfield,
Louisville, Longmont, Parker and High-
lands Ranch. Expanding transit access
to the suburbs is a labor equalizer –
making it easier for suburban compa-
nies to compete for top talent against
urban-based employers.
Developers have been strategic in
targeting new office projects on the
expanded transit lines. Some of the
most notable transit-oriented devel-
opments in the area are taking place
along the southeast light-rail line.
Beginning at the Belleview light-rail
station at the entrance to the Denver
Tech Center is One Belleview Station –
a recently completed 318,000-sf Class
AA office tower developed by Prime
West.The building is part of a 42-acre
mixed-use development surrounding
the station. Minutes away is 50 FIFTY,
an 185,000-square-foot Class AAA office
tower by Corum Real Estate Group,
which broke ground last fall and is
scheduled to deliver in summer 2018.
Moving to the next stop down the light-
rail line, Alberta Development Partners
has proposed plans and is working
with the community to develop a
24-acre mixed-use project at Orchard
station. Finally, the next adjacent light-
rail stop is Arapahoe at Village Center
station, home to the future Granite
Place at Village Center, which includes
a 300,000-sf energy-efficient office
tower by Granite Properties and Con-
fluent Holdings. Construction on the
first of two phases at Granite Place will
complete this year and is 100 percent
leased.
When speaking about the downfall
of America’s suburbs, many place it
in direct contrast to a vibrant down-
town office market. Our analysis,
however, found the U.S. suburban
market strengthening in comparison
to downtowns. For example, while
nationally suburban office vacancy
remains higher than downtown office
vacancy, the gap is shrinking in many
markets across the country and actu-
ally has reversed course in Denver.
Here, suburban office vacancy dropped
50 basis points from 12.2 percent in
fourth-quarter 2015 to 11.7 percent in
fourth-quarter 2016. In comparison,
downtown Denver’s office vacancy rate
rose during the same time frame, up 40
basis points from 12.8 to 13.2 percent.
Although deliveries of spec construc-
tion likely will increase vacancy in Den-
ver’s suburban office markets this year
and next, this will create opportunities
for tenants to better position them-
selves in the market. Demand from
large corporate users, particularly in the
financial services, telecommunications
and health care industries, is expected
to steadily absorb the new supply over
time.
Nationally, the suburban vacancy
rate has not increased for 27 con-
secutive quarters through fourth-
quarter 2016 and stands at 14.1
percent. The suburban market has
registered positive absorption for 27
consecutive quarters as well, under-
scoring its consistent improvement
since early 2010.
We expect suburban office growth
to be moderate in the next few
years but believe the market still
has room to run. Places like Denver
are particularly well poised, where
suburban rent growth, continued in-
migration and an expanding transit
system give developers the confi-
dence to invest in suburban office
projects.s
Lindsay Gilbert
Vice president,
advisory and
transaction
services, CBRE,
Denver