Colorado Real Estate Journal - July 6, 2016
The first quarter of 2016 marked the Denver office market’s 25th consecutive quarter of positive net absorption. Since the beginning of this expansion run, vacancy has fallen 600 basis points to stabilize at 14 percent, while total net absorption has topped 8.1 million square feet and rental rates in core submarkets have reached historical highs. Net absorption for first-quarter 2016 totaled 264,055 sf. The Class A sector fared well, with absorption of 339,508 sf, but the Class B sector contracted slightly, with absorption of negative 69,163 sf. The central business district submarket posted another quarter of solid performance in first-quarter 2016, even as the oil and gas sector continued to downsize by 100,000 sf. The CBD led the market with absorption of 175,213 sf, which equated to 66 percent of the market’s first quarter total, driven by several significant move-ins. The southeast suburban submarket was challenged last year by corporate downsizings but rebounded in the first quarter, posting the market’s second-strongest performance with absorption of 61,839 sf. The Aurora, midtown, northeast and west submarkets logged slight negative absorption, ranging from negative 11,506 sf (west) to negative 8,708 sf (midtown). The northwest, southeast and southwest submarkets finished the quarter with positive absorption ranging from 13,623 sf (southeast) to 36,428 sf (northwest). While average asking rates increased year over year in all submarkets, rates in the core CBD and SES submarkets appreciated 26 percent to 33 percent since the cycle’s low in 2009 and continue to reach record highs. Denver’s strong economy and market fundamentals have supported a development window for the past several years, spurring the return of speculative development. Fourteen projects totaling 2.8 million sf are under construction or renovation. Although most of the projects in the construction pipeline are speculative, developers still are proceeding in a disciplined manner. Current new projects are either heavily preleased, or, if speculative, confined to high demand, niche markets and transit-oriented development locations. Looking Forward We expect lease rates in pre-2000 product in the Skyline and uptown micromarkets to soften by as much as 10 percent due to the lack of velocity in these areas, which have lost tenancy to Lower Downtown over the last several years, and the prevalence of oil and gas sublease space. Oil prices will rebound but not to the levels of $80 to $90 per barrel and, while we anticipate oil approaching $60, it will be some time before it gets there. Legal, accounting and financial services, major CBD employment sectors, are stable. LoDo and the Central Platte Valley are not going to experience the same challenges as the rest of the CBD. While rates for second-generation space are not expected to appreciate more than 3 to 5 percent, rates for new construction, which will continue to fill up over the next six months, will continue to rise, depending on location. The rates that are being achieved this year and beyond in LoDo are the highest the city has ever experienced, breaching $50 on the high end. Rail access will establish or re-establish that a prime location is vital for companies’ abilities to attract and retain key personnel for the future. It is critical to accommodate the increasing millennial population for these major corporations. River North will continue to be an emerging market with the development on the new A line commuter route to Denver International Airport, with some significant leases being signed within the next two months. This activity will give RiNo the traction it needs to establish itself as a submarket that offers a strong option to attract the burgeoning tech market that already is migrating there and will have a larger presence in the future. This market will benefit from the new National Western Center and the Interstate 70 expansion as well as the A Line, all of which will change the character of the neighborhood. Further, several planned new and exciting venues will add to the allure of RiNo. The SES submarket will see strong activity from small users (under 15,000 sf), but there are a number of available large contiguous blocks of space that are intensely competitive with each other. The demand currently is not there for the large corporate user. The majority of the activity will be lateral moves with one space being leased and the former space becoming available, so in essence, trading spaces. Therefore, rates generally will be stagnant and there could be some lease rate wars that transpire over the next year for select blocks of space. The only large transactions that will take place are build-to-suit leases at TOD sites and campus (200,000-plussf) development. The Stapleton, Gateway and Denver International Business Center micromarkets will enjoy their share of demand, but there is very little product available. This area has the chance to be the most aggressive, in terms of new construction, of any other market due to low land cost basis. These micromarkets are well located within proximity to the airport and now have rail transit at their doorsteps. There will be speculative development announced in these micromarkets within the next six to 12 months.