CREJ

Page 10 — Office Properties Quarterly — December 2018 www.crej.com Leasing O ver the past several years, we’ve watched dozens of office developments come out of the ground and mul- tiple existing assets undergo major renovations.With cranes still in the air, the real estate skyline in downtown Denver and surrounding areas will continue to evolve for years to come. While the growth is a welcome sign of the region’s economic vitality, the strength of the market also presents some real challenges for companies as they weigh their real estate options for 2019.With a continued trend of limited inventory and high rental rates, many companies are becoming more creative in how they navigate choosing an office space. As of the third quarter, nearly 2.3 million square feet of office space had been delivered in the Denver metro area this year. Of that, 1.4 million sf was in downtown Denver alone, including highly anticipated projects like 1144 Fifteenth, The Circa Building and Riverview at 1700 Platte.With a current vacancy rate of 14.2 percent, it’s clear that even with so much new construction delivered, demand is still high. While there are more than 2.2 mil- lion sf of office space currently under construction in and around down- town – including The Hub, Block 162, 16 Chestnut, Prism, Platte 15 and Revolution 360 – it still might not be enough to meet demand, especially as the market continues to see an influx of companies from the coasts – a growing trend this year with com- panies such as Xero, Slack, Facebook and Google taking up more real estate in the Mile High City. New businesses entering the market aside, many compa- nies that have had a presence in Denver for several years are growing and find- ing the market isn’t quite as favorable as the last time they signed a long-term lease, which, in many cases, was during the Great Recession when rates were at an all- time low. For some companies, rental rates are increasing by as much as 30 per- cent for their current space, and the prospects outside their building aren’t much better. Denver’s tight employ- ment market further compounds the situation as companies are still look- ing to remain competitive for recruit- ment and retention of top talent, which usually means being centrally located to desirable amenities. For example, rental rates for Class A office space in downtown Denver are sitting between $22 and $38 per sf triple net, depending on the type of building. In Lower Downtown and River North, companies are paying between $32 per sf triple net and $38 per sf triple net for similar spaces. In submarkets like the Denver Tech Cen- ter, companies are still facing higher than usual rates. In all of these loca- tions, operating expenses can vary extensively, with some properties even operating up to $25 per sf. With Denver’s office market expected to remain highly competi- tive in 2019, many tenants are taking a more conservative approach to their commercial real estate decisions, including negotiating more flexibility and concessions, relocating slightly outside popu- lar submarkets to obtain similar spaces at more reasonable rates, reducing the sf-per-person allot- ment within their spaces, and signing as short of lease terms as possible. While many landlords are pushing for seven- to 10-year leases – in part to help cover rising construction costs and increased property values – the majority of tenants are look- ing for three- to five-year leases while they see what the mar- ket does, hoping it may soften. That means many tenants are assessing if they can make their current situation work for a little while longer, necessitating cre- ative solutions to accommodate any expected growth, from smaller work stations to more flexible layouts that can serve a variety of functions. For tenants looking to scale back overhead expenses even further, up- and-coming Denver neighborhoods are offering a slightly better solution for the future. Areas like Globeville – especially alongWashington Street – Cole, Five Points, SunValley and Sunnyside are starting to see more development activity, attracting com- panies looking for an alternative to downtown’s high rents. One develop- ment leading the way is Steam on the Platte, a mixed-use community built around innovation and collaboration that also embraces its industrial his- tory along the Platte River. While these areas might still face limited inventory and inflated rental rates (trending with the rest of Den- ver), they are expected to come at a lower price point than other more well-known areas, meaning many companies can lease larger spaces and still be centrally located. While companies must be more cal- culated in their real estate decisions (memories of the recession are still fresh), the reality is that they still need to act, and act quickly in this market. Companies may be proceeding with caution, but most still are prepared to make a significant investment in their office spaces. Next year will undoubtedly be a telling year for how much influence tenants will have on the market or if a market correction is needed to continue making Denver a competitive environment for busi- nesses to thrive. V Tenants get more creative in real estate decisions Andy Cullen Partner and managing broker, Tributary Real Estate