CREJ

Page 22 — Office Properties Quarterly — June 2020 www.crej.com MCR Premiere Corporate Real Estate Education Around the Globe Learn More & Register (404) 589-3200 learning@corenetglobal.org EARN THE MCR DESIGNATION MASTER OF CORPORATE REAL ESTATE Market Update spective, we need to understand what ultimately drives lease rates down: An increase in vacancy. It’s only been about 75 days since most of us left our offices and started working from home, not enough time for tenants and landlords to really evaluate their situations. Smaller companies still may be enjoying the benefits of their Pay- check Protection Program loans, and using those funds to pay rent, but that money will run out soon. Some other companies have withheld rent (or have been unable to pay rent), but Gov. Jared Polis’ temporary ban on evictions is artificially keeping vacancy low for the moment. There is one major indicator that points toward a decline in Denver’s office lease rates – the amount of sublease space coming onto the market. Today, we have over 1.5 mil- lion sf of office space on the sub- lease market in the central business district alone. This is more sublease space on the market than we’ve had for at least 20 years, up from just over 1 million square feet at the beginning of 2020. Sublease oppor- tunities traditionally offer tenants the ability to secure a below-market lease rate, and, indeed, most sub- lease opportunities on the market right now are quoting rates that are below the rate that the building owner is asking for – sometimes far below. The sheer volume of avail- able sublease space is going to force landlords to compete at rates lower than they’d like. From the tenant point of view, there will be good options in the marketplace right now, and you’ll probably get a better deal today than pre-COVID-19, but there almost cer- tainly is an advantage for those who can wait a little longer before trans- acting. Tenants should be keeping an eye on the “total vacancy” figures. At the end of the first quarter, total vacancy in Denver’s CBD was 14%; once that figure creeps up to 18% most landlords are going to become significantly more aggressive. s Continued from Page 1 be able to select from a larger num- ber of options. Due to the immediate nature of the pandemic, absorption has been impacted sooner and more drasti- cally than in previous recent down- turns. This is the result of forced work-from-home policies, which may become more prominent in go- forward strategies, reduced occupan- cy mandates, as well as health and safety concerns on how to appropri- ately reenter the workplace. With an anticipation that leasing velocity will decrease while availability increases, the competition for diminished near- term tenant demand inevitably will put downward pressure on rents and upward pressure on tenant conces- sions. As we emerge from the full stay-at-home mandates and compa- nies look to formalize their second half of 2020 strategies and head- counts, they should find themselves in a more economically favorable office market. This new environ- ment could support cost-savings initiatives on a direct leasing basis; however, in the event of a relocation, it may present a challenge if compa- nies find themselves in a position of needing to reduce square footage by listing excess space as available for sublease. s Albanese Continued from Page 4 JLL After the dot-com bust in 2001, office rates in Denver didn’t hit their low for 15 quarters and didn’t make a full recovery for over seven years. When the economy crashed in 2008, rates did not hit their low for nine quarters and didn’t fully recover for five years.