Colorado Real Estate Journal - September 16, 2015
Denver’s office market continued its trend of robust expansion, with steadily declining vacancy, solid net absorption and a well-planned development pipeline, through the second quarter of 2015. Vacancy fell to 13.5 percent from 14.8 percent year-over-year and from 13.8 percent in the previous quarter. This is the lowest level since 2000 and well below the 35-year average of 18.1 percent. Quarterly net absorption totaled 593,495 square feet, and year-to-date net absorption reached 1.1 million sf. The central business district’s strong run was interrupted this quarter by oil and gas company closures and downsizing, totaling 180,000 sf, and Bridgepoint Education’s downsizing. These losses drove quarterly net absorption of negative 199,105 sf, and vacancy increased to 12.7 percent from 12 percent in the previous quarter. The price and supply of oil are being watched closely in Denver and in other markets with oil and gas exposure. However, Denver’s CBD has a diverse tenant mix that will insulate against a reprise of the oil and gas bust of the 1980s. Several large leases are poised to drive future growth. Transamerica (121,000 sf) and Liberty Global (70,000 sf) will relocate from the southeast suburban submarket, and Prologis (72,000 sf) will move from the northeast submarket. Co-working space provider WeWork recently announced its first Denver lease totaling 72,000 sf in the CBD. The NW submarket saw a continuation of last year’s strong performance in the first half of 2015. Vacancy plummeted to 13.8 percent, falling 536 basis points from yearend 2013. This represents the lowest level since 2000. Quarterly net absorption was 147,476 sf, driven mainly by the latest round of expansion by SCL Health, which occupied an additional 105,000 sf at the Oracle Campus. The SES submarket dominated the market in 2013 but ended 2014 in the red due to First Data downsizing significantly and Charles Schwab vacating two full buildings in a move to its own campus. The SES quickly returned to expansion mode in 2015 and logged the market’s second-strongest performance in the second quarter of 2015. Quarterly absorption was 212,450 sf, bringing year-to-date absorption to 327,514 sf. Vacancy decreased 140 basis points to 12.5 percent from 13.9 percent at year-end 2014. The quarter’s largest move-in was Travelport’s relocation to 120,000 sf at Panorama Corporate Center V. The SES is expected to post robust positive absorption in 2015 and 2016 as the vacant Charles Schwab space is backfilled and expansion is driven by continued growth in financial services, professional and business services and homebuilding-related sectors. Class A and Class B direct rental rates (median, full service) in the core submarkets continued to set new all-time highs: CBD Class A rates rose 23.7 percent from year-end 2009 to $35.25 per sf, and Class B rates increased 20 percent to $27 per sf. Similarly, SES Class A rates rose 23.8 percent to $26 per sf, as Class B rates experienced a 27.3 percent increase to $21 per sf. Denver’s office investment market posted total sales in excess of $2 billion in 2013 and again in 2014, the best performances since 2007, and this trend continues. In second-quarter 2015, sales totaled 2.3 million sf valued at $400 million, which brings Denver’s year-to-date office sales to 5.8 million sf totaling $1.1 billion. The quarter’s top sale was KBS’ purchase of Village Center Station I for $76.7 million, which equates to $327 per sf, a new record for a multitenant suburban office building sale in Denver on a per sf basis. Denver continues to be a hotbed for equity placement, particularly in areas with speculative construction – Lower Downtown and Skyline in the CBD and River North in Midtown. These micromarkets are seeing rising rental rates, compressed cap rates, new record prices and abundant capital chasing limited inventory, with off-market transactions becoming more common. These trends are beginning in the SES and NW submarkets and are expected to continue as new investment capital enters the Denver market and investors focus more on the suburbs due to a shortage of opportunities and stiff competition in the CBD. Denver’s strong economy and market fundamentals have opened a development window – 14 office projects, totaling 2.8 million sf, are currently under construction or renovation. This represents the largest development pipeline since 2006. The future looks bright for Denver’s economy and office market. Now in the middle of its sixth year, this sustained growth has resulted in absorption totaling 7.7 million sf and a steadily decreasing vacancy rate, down to 13.5 percent from 20 percent at year-end 2009. Denver’s enviable economic fundamentals and quality of life are a draw for both millennials and companies that seek to hire them. This dynamic is driving the explosive development of emerging neighborhoods, such as River North, which are attracting creative businesses in search of nontraditional or co-working space. The stage is set for continued expansion in 2015 and beyond.