Colorado Real Estate Journal - September 21, 2016
The expansion of the Denver office market continued into the second quarter of 2016, which marked the 26th consecutive quarter of positive net absorption. Vacancy has stabilized at 13.7 percent, representing a drop of more than 600 basis points from its peak at year-end 2009, while total net absorption has topped 8.4 million square feet and rental rates in core submarkets have reached historical highs. Net absorption for second-quarter 2016 totaled 284,330 sf, and year-to-date absorption reached 538,157 sf. Occupancy in the central business district (CBD) submarket contracted slightly in second-quarter 2016, driven by downsizing among oil and gas firms totaling approximately 93,000 sf and a corporate relocation. The CBD posted quarterly net absorption of negative 93,959 sf, but year-to-date absorption remained positive at 81,254 sf. Vacancy increased to 14.2 percent from 13.9 percent in the previous quarter and year-over-year from 12.8 percent. In the face of low oil prices and global oversupply, Denver has shown resilience due to its diverse tenant mix. Downsizing and closures by oil and gas firms has accounted for close to 760,000 sf of negative absorption over the past six quarters, but these losses were almost entirely offset by growth in other industry sectors, leaving the CBD with flat absorption. Though the oil and gas situation likely will get worse before it gets better, significant moveins by Prologis, DaVita and Antero Resources will drive positive absorption of more than 500,000 sf in the next three to 12 months. The northwest (NW) submarket saw a continuation of the strong performances posted in 2014 and 2015, driven by organic growth. Vacancy fell to 11.4 percent, the lowest level since 2000, and now is lower than that of the CBD or southeast suburban (SES). Quarterly net absorption was 64,538 sf, bringing year-to-date absorption to 100,966 sf. This momentum is forecast to continue throughout 2016, driven by continued growth in the technology sector, which has strong roots in the NW, and new tenants in diverse industries attracted to the location and quality of life. This growth is fueling a housing boom, which will further enhance the draw of the area. Having weathered the storm of corporate downsizing in 2015, the SES posted positive absorption in the first half of 2016, driven by corporate expansion. The SES ended the second quarter with the market’s strongest performance, logging quarterly net absorption of 147,161 sf and year-to-date absorption of 198,772 sf. Vacancy decreased to 14.3 percent from 14.5 percent in the previous quarter but was up year-over-year from 13.5 percent. The Class A sector was responsible for the majority of the submarket’s absorption, with quarterly and year-to-date absorption of 140,128 sf and 168,197 sf, respectively. The SES is expected to hold steady in 2016, buoyed by continued organic growth in financial services, professional and business services, telecom, health care and home-building-related sectors. Direct asking rates increased year-over-year in all submarkets, and rates in the core submarkets continued to reach record highs. In the CBD, Class A rates rose 29.3 percent from year-end 2009 to $36.85 per sf, and Class B rates increased 28.9 percent to $29 per sf. These rates continue to set records for all-time highs. Class A rates in some new buildings, propelled upward by property tax increases, have breached $50 per sf, a level never before seen in Denver. SES Class A rates stood at $26.50 per sf and have eclipsed the previous cycle’s peak recorded at the fourth quarter of 2008. Class B rates were $22.35 per sf, which beats the previous high recorded in 2008 and represents a 35.5 percent increase from the cycle’s low of $16.50 per sf recorded in 2009/2010. In second-quarter 2016, sales totaled 2.1 million sf valued at $304.0 million, bringing year-to-date totals to 5.2 million sf for a total of $900 million. In Denver’s red-hot investment arena, now considered a top-tier market, activity remains strong, but with the exception of core assets, pricing and cap rates on all other product classes are showing signs of flattening. During the second quarter, the office market saw significant suburban sale activity and repricing of older Class A office towers, particularly in the northern part of the Denver Tech Center, with this category of buildings selling below or at approximately equal pricing from 10 years ago. This pricing reflects the large capital improvements needed for these aging buildings despite excellent locations. Denver’s strong economy and market fundamentals have supported a development window for the past several years, spurring the return of speculative development. Sixteen projects totaling 3.5 million sf currently are under construction or renovation. Although most of the projects in the construction pipeline are speculative, developers are still 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 (TOD) locations. The future looks bright for Denver’s economy and office market. The University of Colorado’s Leeds School of Business forecasts that Colorado will gain 65,100 jobs and 95,000 residents in 2016. The professional and business services sector, one of the top office-occupying industry sectors, is projected to grow by a robust 4.3 percent in 2016, adding 15,000 jobs. Denver was ranked sixth among U.S. markets to watch in 2016 in the prestigious Emerging Trends in Real Estate report, which cited its quality of life, culture, growing concentration of technology firms, strong local economy and investment in public and private infrastructure, all of which will foster sustainable growth. It is not surprising that Denver is one of the fastest growing metro areas, ranked seventh for population growth from 2014 to 2015.