CREJ

Page 4 — Office Properties Quarterly — March 2018 www.crej.com Market Update D enver’s office market has maintained its strong eco- nomic support, 2017 added approximately 57,500 jobs, according to the Bureau of Labor Statistics. Throughout the year, firms from various industries announced major relocations or expansions, including Amazon.com, J.M. Smucker Co., Sierra Nevada Corp., Ball Aerospace, Lockheed Martin, UCHealth, Vertafore Inc. and UPS. In 2018, Hestra Gloves, Marketo and Maxar Technologies announced future job creations. In 2017, the Denver metropolitan statistical area boasted the lowest major metro unemployment rate for several months, at or below 2.4 percent. CoStar data indicates vacancy increased approximately 100 basis points to 11.9 percent in the fourth quarter. There was over 2.6 million square feet of completed construc- tion throughout the year, with the first quarter posting the only nega- tive absorption of 617,852 sf. Subse- quent quarters posted 1.2 million sf of positive absorp- tion and the cur- rent year-to-date 2018 absorption is positive 420,596 sf. Considering the amount of delivered square footage and its minimal impact on vacancy rates, demand for office space justified the development pipe- line. Large leases signed in new build- ings include Western Union’s deal for 267,000 sf at One Belleview Sta- tion, The Travelers Cos.’ moving into 142,000 sf at Inova Dry Creek 2 in January and Charter Commu- nications occupying 257,000 sf in Granite Place at Village Center as of October. Fourth-quarter 2017 deliv- eries were 65 percent preleased. Preliminary year-end 2017 office employment numbers from the BLS indicate the professional and busi- ness services, financial activities and information employment sec- tors added 10,900 jobs in the Denver MSA. In order to maintain relatively stable vacancy, with 4.3 million sf currently under construction, the MSA needs to gain approximately 18,000 office jobs. Given the pace of company expan- sion announcements, office employ- ment growth should remain suffi- cient in 2018 to occupy new product. An in-migration slowdown causes concern over a lack of new workers; though, one of its chief causes, rising apartment rents, has stabilized. Subdued rent growth in the second and third quarters of 2017 suggested a possible plateau for rents that grew 5.4 percent annually from the fourth-quarter 2011 to fourth-quar- ter 2016. However, fourth-quarter rent ended last year 3 percent higher than the first quarter. Once again, a slowdown in rent appreciation seems likely in early 2018, with YTD 2018 rates increasing 0.3 percent. With a large development pipeline still on the horizon, it will be dif- ficult to raise rents in existing Class A space. Premium product in the hot Lower Downtown and Platte River submarkets is already seeing slight asking rent decreases. The southeast corridor market, from Hampden to Lincoln, also is reporting slight rent contractions in Class A space, but Class B and C asking rates in the corridor slightly increased. New Class A deliveries are increas- ing competition throughout the Den- ver MSA, and rising prices are put- ting pressure on tenants. The past few years of strong rental growth caused tenant renewal sticker shock. Businesses are willing to slightly downgrade out of Class A space, as proximal Class B square foot- age is available and landlords are improving finishes and amenities. The active value-add market creates many improved Class B buildings. Healthy fundamentals continue throughout Denver Joshua Manning Research analyst, Avison Young, Denver Avison Young Denver office market rent and vacancy trends from 2012 to 2018 Avison Young Denver office market sales volume and cap rates from 2012 to 2017 Please see Manning, Page 21