CREJ

Page 4 — Office Properties Quarterly — June 2018 www.crej.com Market Update D enver’s reputation as a global city has dramatically improved over the past sev- eral years. Strengthening demographic trends and a favorable business climate have enticed many companies to migrate to the Mile High City and capitalize on the area’s advantages. • Rapidly expanding economy strengthens Denver office market. In the past 15 years, the metro has welcomed roughly 640,000 new resi- dents, a 28 percent increase of the overall population. The millennial population advanced at a similar clip during the same period. Robust in- migration stemming from all areas of the country has led to an especially talented labor pool, as 40 percent of those 25 and older obtain a bach- elor’s degree or higher, well above the national average of 29 percent. As a result, the job market has turned very competitive. Denver’s sub-3 percent unemployment rate has placed pres- sure on employers to offer better compensation packages to attract top talent. This, along with an influx of high-wage jobs, propelled the median income 40 percent since 2003 to a figure now exceeding $75,000 per household. Tech continues to be a growing source of employment in Denver, as companies migrate from a variety of coastal cities, seeking to elude the elevated costs of doing business in their local markets. This contributes to bolstered office-using job creation, which, in turn, has strengthened the overall office market. Metro vacancy has fallen 390 basis points to 15.2 percent since the recessional peak in early 2010. Even the city center, an area receiving heightened devel- oper interest in recent years, posted a 470-basis-point decrease to 16.5 percent over the same time frame. Although vacancy in most submarkets is falling, rates are rising in neighbor- hoods around the urban core. These vacancy increases can be largely attributed to ongo- ing rejuvenation efforts, pricing tenants out of the area. However, vacancy should soon begin to stabilize as the transitioning stage phases out. As overall demand for office space remains strong, rent growth has acted in accordance by advancing at an average rate of 4.1 percent over the past five years, pushing Denver’s average asking rent to $25.97 per square foot. This number outpaces the national average of 3.5 percent during the same period. Submarkets adjacent to downtown Denver have experienced the most substantial rent gains in recent months, due to landlords’ efforts to make their properties more competitive with the nearby Class A space. Although newly constructed office properties with typically higher asking rents played a part in boosting average rates, space upgrades remain the key driver of rent growth in these areas. Strong gains in nearby Boulder are broadly driven by Google’s entrance to the office market. Expect rent growth to percolate down Highway 36 and into Denver’s northwest corridor in the near future. The encouraging office market trends witnessed in Denver have lured developers in recent years, par- ticularly during the past 12 months when over 3 million sf of space was delivered. This total contributes to the 10.3 million sf added to the metro’s inventory since early 2011. Downtown Denver and the Denver Tech Center remain focal points for builders, as companies’ desire to set up shop in the metro’s primary business districts serves as a basis for development. Here, new office construction helped create live-work-play communities, an appealing aspect for many resi- dents and one that should continue to stimulate office development. As for medical office construction, Denver logged its cyclical high in 2017 when 610,000 sf were delivered, con- tributing to the 2.2 million sf received since the recession. Last year’s heightened completion sum support- ed the strong space demand of this property type, as vacancy is around 9 percent, following the 120-basis-point decline in 2017.With relatively tight market conditions, rent gains have been steady, providing stable revenue streams for landlords, a trait similarly Office demand in Denver metro remains strong Brian C. Smith, CCIM, SIOR Vice president investments, Real Estate Investment Services, Marcus & Millichap Please see Smith, Page 25