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Page 4 — Office Properties Quarterly — December 2017
Market Update
A s the national economy’s
robust performance contin-
ues to push gross domes-
tic product growth, the
heightened pace of devel-
opment will persist. Nationwide,
office construction surged in 2017
as almost 100 million square feet
was delivered; it was received well
as absorption nearly matched that
figure. Strong office absorption
has been a common trend in the
United States in recent years, a
pattern that will continue in 2018
as building activity will subdue and
demand will climb.
In past years, Denver consistently
reported one of the tightest job
markets in the country, a trend
that persisted in 2017. Currently,
the unemployment rate sits slight-
ly below 2.5 percent, a number
expected to remain steady in com-
ing months as companies continue
the rapid hiring of limited avail-
able talent. Although the Mile High
City’s labor market is tight, the
increasing percentage of residents
with bachelor’s degrees prompted
companies to ignite development
in recent years. In 2017, construc-
tion activity increased as more
than 2.2 million sf was completed
in the first nine months, up from
about 650,000 sf delivered in the
same period last year.
Many of the recent completions
are located near RTD light-rail
stations and Interstate 25, easing
commutes of residents. Downtown
Denver will receive
around 250,000 sf
in the fourth quar-
ter, putting the
submarket’s yearly
sum at 650,000 sf,
about one-quarter
of this year’s total
deliveries. Pro-
gressing farther
from the central
business district,
the Denver Tech
Center and Cen-
tennial in south-
eastern Denver
noted significant development in
the first three quarters as roughly
1 million sf was built. Farther south
on I-25, Castle Rock facilitated its
expansion by adding more than
160,000 sf since midyear 2016.
Despite increased space in the
metro, healthy absorption helped
maintain vacancy at 14.9 percent,
which is 180 basis points below the
10-year average.
The metro recognized a decline
in vacancy in the past 12 months
due to intensified demand. Aurora
and the West Denver submarket,
which includes areas in Lakewood
and Wheat Ridge, experienced the
largest yearly change since October
2016 with vacancy drops exceed-
ing 100 basis points. Downtown
Denver also logged a considerable
vacancy reduction in the previous
four quarters as demand pushed
the rate down 110 basis points. The
overall rise in rents priced many
businesses out of the urban core
and forced them to seek lower-
cost alternatives in the suburbs. In
recent quarters, suburban proper-
ties averaged slightly above $23 per
sf. The average asking rent among
CBD office space is inching closer
to $33 per sf, over $7 more than
the metro average. Although urban
space experienced a marginal rent
decrease in the past 12 months, a
sizable gap still remains, encourag-
ing companies to make cost-effec-
tive decisions.
The potential for high revenue
growth lured many investors to
Denver in 2017. Buyers searching
for assets in the $1 million to $10
million price tranche traded in the
suburbs of Littleton and Engle-
wood, where buildings with 1970s
and 1980s construction averaged
cap rates in the mid-6 to mid-7
percent realm. On the other hand,
newer projects built since the turn
of the millennium attracted many
institutional buyers to areas in
Centennial and Greenwood Village.
Here, initial returns covered the
mid-5 to 6 percent range.
Looking ahead, market dynamics
will remain strong in 2018. Denver
will retain one of the lowest unem-
ployment rates in the country with
the forecasted addition of 20,000
employees. Employers such as
Lockheed Martin and CenturyLink
are expected to continue adding
to payrolls, propelling an already
thriving economy. The expectation
of strong leasing activity will boost
demand in 2018 as almost 4 million
sf of office space is slated for deliv-
ery. Investors can expect a healthy
office market going forward.s
Bob Kaplan
Vice president/
regional manager,
Marcus &
Millichap, Denver
Buyers searching for assets in the $1
million to $10 million price tranche traded
in the suburbs of Littleton and Englewood,
where buildings with 1970s and 1980s
construction averaged cap rates in the
mid-6 to mid-7 percent realm.