CREJ - Office Properties Quarterly - March 2022
The appeal of working in Denver’s central business district is diminishing. Tenants have been migrating toward other submarkets of downtown - Denver and out of downtown altogether. In a new-look world heavily altered by the pandemic, in some situations companies and workers have been forced and, in other situations, have been drawn, from the CBD to suburban and uptown locations. Despite the notably consistent yearly increases of asking rents across Denver for the last decade, rates remained flat in 2021 at $39.70 per square foot full service. Feelings about safety and comfort in certain central neighborhoods, as well as lifestyle and workplace preferences, have changed significantly in recent years and especially since the pandemic began. Desires for walkability, open spaces, easier parking and work-from-home options have all been major drivers for the tenant migration throughout Denver. Even law firms, which typically leased expansive offices for their partners with lavish lobbies and couches, are opting for more efficient layouts with smaller offices and shared spaces. The CBD, also once the marquee location for the oil and gas industry, is seeing tenants jump ship for smaller spaces. A major shift in priorities for businesses and workers is occurring, and the office landscape in the city is consequently transforming to incorporate these new preferences. Almost all new development in downtown Denver is in the Central Platte Valley and River North. For perspective, there has been no new construction in the CBD since 2019, with only one 59,000-sf property currently under construction. In the River North and Platte River submarkets, 769,000 sf of office space is under construction and slated for delivery later this year and in 2023. Vacancy percentages and time frames in the CBD also stand out among the other submarkets. CBD vacancy is the highest across metro Denver at 23.9%, with suites in the submarket having an average vacancy time of 18.5 months. Suites in Lower Downtown, on the other hand, have an average vacancy time of 12.4 months, with Denver as a whole seeing an average time of 13.6 months. Outside of downtown, it was south Denver that was the frontrunner for total space leased in 2021. The submarket saw 11 transactions that each totaled over 50,000 sf last year. Newer Denver industries, like aerospace, defense and bio/life sciences, continue to forego downtown and are occupying space in the southeast, Aurora and Broomfield markets. Yok Space Systems leased 138,000 sf at 6060 S. Willow in the Denver Tech Center, a newly renovated building with inviting outdoor space, a fitness center and electric vehicle charging stations. Tenants are starting to ask questions about building safety, whether the HVAC system was recently installed or renovated, and how the building is conducive to environmental and personal health concerns. LEED certifications will no longer win you more tenants as a landlord since they have become standard practice in construction, so as a result, not having these certifications will cause you to lose tenants. With much less new construction in CBD, new amenities oriented around personal and environmental health are harder to come by. For example, only 29% of office buildings in the CBD are LEED certified. Another trend happening across the market is downsizing into more modest, close-to-home offices. Tastes have changed, and tenants are less willing to put up with the current high rates of, for example, $26 operating expense triple net in the CBD for product built in the 1970s and ’80s. Downtown was the marquee location for law firms, and the oil and gas industry and is losing a few of the biggest players in the respective industries. DCP Midstream, a Fortune 500 oil firm, is moving to 80,000 sf at 6900 Layton, Belleview Station’s newest tower in the Denver Tech Center. Previously, the company occupied 171,000 sf of space in the CBD. From high real estate taxes to the recent push for buildings with modern amenities, companies are reluctant to renew leases in older product in the CBD. In some instances, companies downsizing their footprint has allowed them to move into higher-quality buildings without sacrificing their budget. Also accelerating this shift is the reduction in community safety from the widespread socioeconomic impacts of COVID-19. For example, in late February, 42 individuals were arrested as part of a single “large-scale enforcement operation” in Union Station, which is close to LoDo, to curb outstanding warrants and illegal activity, according to Denver Police Department. This concentration of crime may explain in part why every major building proposal in downtown is planned in uptown River North, with no construction happening in LoDo and CBD. Tenants are less eager to ride the light rail and take clients on a sidewalk jaunt in these areas, and they are more willing to take advantage of the trails, walkability and pedestrian-friendly open space that is available in uptown Denver and the southeast. Abundant parking in the southeast market is also at a fraction of the cost of downtown Denver, providing added appeal for office occupiers. jack.ellis@transwestern.com cheryl.casserly@transwestern.com