CREJ - Office Properties Quarterly - September 2016
Denver continues to be one of the hottest markets in the country for population, housing and economic growth. The city also boasts the fifth-highest millennial population in the United States. Young, educated workers are flocking to the state, helping to attract new companies and grow existing businesses. The Colorado Office of Economic Development and International Trade reports that since 2013, the state has attracted or retained 111 companies and 27,076 jobs. It’s not surprising that the office lease market has followed suit. Vacancy rates have declined for more than four years running. Since 2012, Lower Downtown has led the way in total net absorption, adding 843,000 square feet of occupied space through the second quarter. Market factors have combined to create record-high lease rates in the central business district and all submarkets. Rates have climbed to an average of $40.06 per sf, 9.7 percent higher than first-quarter 2015. And rents for trophies (ultra-premium office towers within the Denver skyline) are even pricier at $42.83 per sf. Is there any rental rate relief in sight? JLL’s data indicates that new construction coming on line is finally slowing vacancy compression. The 3.3 million sf under construction in Denver represents a 10-year high. Though only 23.3 percent is leased, builders remain optimistic as Denver’s diversified tenant base continues to tighten fundamentals this year. In particular, Denver has successfully fostered a culture of innovation that’s attracting Silicon Valleystyle startups. That said, we expect all this new construction and competition from subleases ultimately is going to impact the rate at which we see new leases. Owners likely will have to lower rates or offer more concessions to fill the buildings. I work with companies of all sizes and the most common question across the board of late is: What can we do in the near term to secure a great space that’s going to help us attract (and keep) the best of the millennial talent flooding to the area without breaking the bank in the current market? Here are five strategies for maximizing the efficiency and effectiveness of an office environment to attract and retain talent, and mitigate the effects of paying top-cycle rates. Be flexible. Small or quickly growing companies should be as agile as the people they are trying to attract. If your business allows it, consider alternatives to the traditional long-term lease (i.e., a sublease with more flexible terms). The sustained depression in the oil and gas market is slowly freeing up more space for subleasing. We recently represented growing tech company CommercialTribe in just such a deal, helping it negotiate excellent sublease terms that allowed the company to customize its space to support its brand and attraction/ retention strategy. Maximize the efficiency of the square footage. Once the ideal location is found, avoid sticker shock in the current market by maximizing the efficiency of the square footage. That ultimately might mean a slightly smaller per-person square footage allocation, but if the space is planned appropriately, the office can be more functional for employees and the bottom line. Consider free addressing for employees. Instead of assigning each employee a set workstation (and square footage), consider empowering employees to make their own choices about where they work within the office, depending on the task. An employee may take her laptop to the quiet area for heads-down work in the morning, but switch to a more social lounge type space in the afternoon for collaborative work. Look for buildings with built-in common space amenities. In order to be competitive, many older buildings in Denver are renovating to meet the demands of today’s tenants. Think: common rooftop patios, restaurants, Wi-Fi throughout, gyms, all-hands meeting areas, etc. Take a page from the Google playbook. Think about the amenities that will make people want to come into the office and stay there. The Wells Fargo building, for example, recently completed common area and gym renovations as well as a lobby renovation that includes a massive video art installation to give the space an edge and attract a new generation of tenants. Future-proof the office space. Work with a knowledgeable broker who can help secure lease terms that will allow the company to grow in the space, should it so choose. Negotiate first right of refusal on adjacent spaces to have the option of expanding within the current space, and make sure the layout is conducive to an efficient expansion. For example, a recent identity security client was able to strategically locate the break room and boardroom so that when the firm expands, the room will support the added employees and there will be no need to rework high-cost infrastructure.