CREJ - Office Properties Quarterly - December 2017
As the national economy’s robust performance continues to push gross domestic product growth, the heightened pace of development will persist. Nationwide, office construction surged in 2017 as almost 100 million square feet was delivered; it was received well as absorption nearly matched that figure. Strong office absorption has been a common trend in the United States in recent years, a pattern that will continue in 2018 as building activity will subdue and demand will climb. In past years, Denver consistently reported one of the tightest job markets in the country, a trend that persisted in 2017. Currently, the unemployment rate sits slightly below 2.5 percent, a number expected to remain steady in coming months as companies continue the rapid hiring of limited available talent. Although the Mile High City’s labor market is tight, the increasing percentage of residents with bachelor’s degrees prompted companies to ignite development in recent years. In 2017, construction activity increased as more than 2.2 million sf was completed in the first nine months, up from about 650,000 sf delivered in the same period last year. Many of the recent completions are located near RTD light-rail stations and Interstate 25, easing commutes of residents. Downtown Denver will receive around 250,000 sf in the fourth quarter, putting the submarket’s yearly sum at 650,000 sf, about one-quarter of this year’s total deliveries. Progressing farther from the central business district, the Denver Tech Center and Centennial in southeastern Denver noted significant development in the first three quarters as roughly 1 million sf was built. Farther south on I-25, Castle Rock facilitated its expansion by adding more than 160,000 sf since midyear 2016. Despite increased space in the metro, healthy absorption helped maintain vacancy at 14.9 percent, which is 180 basis points below the 10-year average.
The metro recognized a decline in vacancy in the past 12 months due to intensified demand. Aurora and the West Denver submarket, which includes areas in Lakewood and Wheat Ridge, experienced the largest yearly change since October 2016 with vacancy drops exceeding 100 basis points. Downtown Denver also logged a considerable vacancy reduction in the previous four quarters as demand pushed the rate down 110 basis points. The overall rise in rents priced many businesses out of the urban core and forced them to seek lower cost alternatives in the suburbs. In recent quarters, suburban properties averaged slightly above $23 per sf. The average asking rent among CBD office space is inching closer to $33 per sf, over $7 more than the metro average. Although urban space experienced a marginal rent decrease in the past 12 months, a sizable gap still remains, encouraging companies to make cost-effective decisions. The potential for high revenue growth lured many investors to Denver in 2017. Buyers searching for assets in the $1 million to $10 million price tranche traded in the suburbs of Littleton and Englewood, where buildings with 1970s and 1980s construction averaged cap rates in the mid-6 to mid-7 percent realm. On the other hand, newer projects built since the turn of the millennium attracted many institutional buyers to areas in Centennial and Greenwood Village. Here, initial returns covered the mid-5 to 6 percent range. Looking ahead, market dynamics will remain strong in 2018. Denver will retain one of the lowest unemployment rates in the country with the forecasted addition of 20,000 employees. Employers such as Lockheed Martin and CenturyLink are expected to continue adding to payrolls, propelling an already thriving economy. The expectation of strong leasing activity will boost demand in 2018 as almost 4 million sf of office space is slated for delivery. Investors can expect a healthy office market going forward.