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Page 4 — Office & Industrial Quarterly — December 2020 www.crej.com OFFICE — MARKET UPDATE I t is the best of times. It is the worst of times. It is the age of record home prices. It is the epoch of high unemploy- ment. It is a time of suburban appeal; it is a time of mounting lockdowns. It is a spring of new office technologies; it is the winter of working from home. It is a sea- son of unsettled landlords; it is a year of cautious optimism. COVID-19 has rocked the office market to its core nationwide, and Colorado has not escaped unscathed. Despite an influx of recent relocations from the West Coast, office vacancies have trended upward and rental rates have fallen stagnant. Nearly 12 months ago, Denver Tech Center, one of the metropolitan’s largest employment hubs outside of the central business district, boasted a steadily declining vacancy rate, ending at 13% in the first quarter. Vacancies have since grown by 380 basis points to 16.8% in the third quarter – representing itself as a true microcosm for much of greater Denver’s office market. Throughout 2020, Paycheck Pro- tection Program loans helped insulate tenants from the heavy liquidity crunch in March and ongo- ing COVID-19-related issues since then. However, as rolling lockdowns begin to stage a comeback across the U.S., the comfort and appeal surrounding technologies like Zoom continues to grow. In many cases, COVID-19 has fortified these tools as commonplace and expected. The convenience, safety and cost sav- ings that digital space provides over physical space has been difficult to ignore. Short-term success stemming from these newly implemented technologies and work-from-home protocols have led some office-occu- pying industry groups to question one of their larg- est expense items – occupancy costs. The uncertainty from the looming macroeconomy and a diminish- ing necessity for space has caused a weakening in office leasing fundamentals nation- wide, and many landlords have been forced into greater flexibility. Across a gross majority of Colorado office submarkets, rental rates have paused from their rapid growth and concessions have increased. At the end of third quarter, Denver saw 900,000 square feet in negative net absorption, the greatest nega- tive metric since 2002. With many companies forcing their employ- ees to work from home alongside a decreased need for space, sub- leasing has experienced steady growth and now sits at 4.7 million sf across the Denver metropolitan area, increasing by 46 basis points to 1.6%. Overall, Denver’s vacancy rate in the third quarter increased by 110 basis points to 12.4% from the prior quarter. Class A proper- ties saw a jump from 11.4% to 12.8% from the second to third quarter, while Class B properties fared slightly better, moving from 12.1% to 12.8%. Denver’s largest submar- ket, the southeast area, reported a 110-basis-point increase to 14.2%, while Denver’s second-largest office submarket, downtown, reported a 170-basis-point increase to 15.6%. Looking ahead, it is expected that vacancy rates will continue to mod- erately increase from COVID-19-re- lated complications and the more than 2.6 million sf of office space being built in the coming quarters. The premium between downtown and suburban office market rents remains near 30%; however, that number likely will tighten the lon- ger COVID-19 remains. For investors, understanding the long-term yield on an office build- ing has increased in complexity due to uncertain variables, causing a rapid drop in office market liquid- ity in 2020. The first quarter saw its greatest net investment volume since late 2018 at $886 million. The second quarter saw volume drop by 86% to $116 million. As the mar- ket began to better understand the virus and its effects, volume picked up in the third quarter to $642 mil- lion, consistent with the quarterly volume of prior years. Fourth-quar- ter estimates remain uncertain, but the recent announcement of a suc- cessful vaccine has helped refuel sentiment. Long-term investors remain highly optimistic on Colo- rado’s underlying fundamentals for office space. Since the April shutdowns, Denver already has reclaimed more than 50% of the lost jobs. Colorado cit- ies recently took four of the top five spots in the U.S. News and World Report rankings of the Best Places to Live in the country in 2020-2021, offering the best combination of value, desirability, strong job poten- tial and high quality of life. Denver’s housing market ascended in 2020 to one of the most competitive in the nation, driven by a massive influx of transplants moving from highly taxed or highly dense urban areas. In the last six months, Denver has been the recipient of major com- panies announcing expansions or relocations to Denver such as Ama- zon, Contentful, Healthpeak Proper- ties, LogistiCare Solutions, Palantir Technologies, Wix and more. Colo- rado offers all businesses a highly educated, young, tech-friendly workforce, and continues to draw talent and capital from all over the United States. These fundamentals have helped position Denver as a city whose market will recover most quickly from the pandemic-induced recession. Denver has proved itself as one of those rare cities that not only strives for a superior work- live-play atmosphere, but also achieves it. As Charles Dickens wrote, “I see a beautiful city and a brilliant people rising from this abyss,” where the uncertainty and fear of this time gradually expires, wearing itself down into a rebirth as a new, ameliorated city. s A bumpy 2020 makes its impact felt on office assets Your commercial property loans done right. Take advantage of our local expertise and a national banking presence. Our clients come to Chase for our exceptional service, quick turn times, and a clear path to closing with no surprises. Call Sara Croot, Client Manager at (303) 512-1293 or visit www.chase.com/cml-saracroot Credit is subject to approval. Rates and programs are subject to change; certain restrictions apply. Terms and conditions subject to commitment letter. Products and services provided by JPMorgan Chase Bank, N.A. ©2020 JPMorgan Chase & Co. All rights reserved. Chase is a marketing name for certain businesses of JPMorgan Chase & Co. and JPMorgan Chase Bank, N.A., Member FDIC. 420236 CHASE COMMERCIAL MORTGAGE LENDING Retail | Mixed Use | Office | Industrial Thevin Campton, CCIM Senior associate, investment services, Colliers International, thevin.campton@ colliers.com