CREJ

Page 4 — Office Properties Quarterly — June 2020 www.crej.com Market Update W ith the impact of COVID- 19 still unfolding, much remains unknown about the future demand for office space. We know that downtown Denver’s office market was strong heading into the pandemic, with significant leasing activity representing a diversity of industries. But a global pandemic – and a record-breaking decline in oil price futures – has introduced significant economic pressure on many companies. Those effects are starting to show in the downtown Denver office market with avail- able sublease space rising to more than 1.5 million square feet at the end of May. That represents a 15% increase from a month earlier and is 65% higher than second-quarter 2019. n What happened in the first quarter? In downtown Den- ver, specifically, leasing volume was strong with approximately 700,000 sf of leases transacted in the first quarter, a 71% increase year over year. The technology sector had continued to lead tenant activ- ity and accounted for approximately 30% of all lease activity over the past four quar- ters. The first quarter marked the 12th consecutive quar- ter of positive net absorption in metro Denver’s office market, totaling approxi- mately 415,355 sf and driven main- ly by a flight to quality for many tenants to Class A and Class B space. While the first quarter statistics did not yet reflect the influence of the COVID-19 pandemic, which became apparent in Denver in mid- March, we expect the second and third quarters to more accurately reflect a recession resulting from sharp declines in gross domes- tic product and employment. n What’s the impact of the oil price drop? This year, oil prices have experienced a steep decline as the result of a price war and decreased demand for oil in the wake of the global coronavirus pan- demic. In March, prices fell by 57% then, for the first time in recorded history, future prices dragged into negative territory, hitting -$37 per barrel. The full impact of COVID-19 com- pounded with the oil price drop cannot be projected, but historical analysis can provide perspective. There is evidence that a full recov- ery can be achieved in downtown Denver after an expected contrac- tion, given the market fundamen- tals leading up to these events, as well as Denver’s performance in the wake of past market shocks. In past oil-price declines, the downtown office market has shown resiliency. The price decline of 2014- 15 resulted in a spike in vacancy rates, a flattening of lease rates and an increase in space offered for sublease downtown. The disrup- tions were temporary, and growth in other industries, particularly financial services and tech, shielded downtown Denver from the sever- est impacts. CBRE data shows that Denver’s downtown office market has diver- sified significantly over the past five years, with growth from industries like tech and financial services leading the way. Whereas energy companies claimed 17% of down- town’s office space in 2015, that share has receded to 14% this year, 4.1 million sf. Meanwhile, tech firms occupy 11% of downtown office space this year, up from 2.4% in 2015. This diversification insulates Denver to some degree from eco- nomic shocks that may dispropor- tionately impact select industries. n What is the outlook? As statewide and local orders are evolving, we will be watching to see how busi- nesses and communities react to reopening with modifications, and how landlords respond. As offices reopen, the full amount of excess space may not become available immediately. Even as employers may have reduced their headcounts, this will be counter- balanced by the near-term need to account for additional space per employee to maintain social distancing. Regardless, the second quarter is showing softening of the downtown Denver office market due to the impacts of the pandemic. With significant sublease space on the market combined with the impending delivery of approximate- ly 1.1 million sf of speculative office development, many companies will Office absorbs a dual hit with COVID-19, oil prices Anthony Albanese Senior vice president, CBRE Nicholas Weld First vice president, CBRE Please see Albanese, Page 22 CBRE