CREJ - Office Properties Quarterly - December 2016
The remarkable Denver economy has been extensively charted over the past several years, with chronicles devoted to the influx of capital and talent. In 2016, for the second year running, Forbes named Denver as the best place for business and careers in the U.S. and attributed this recognition to the city’s reputation as a hot spot for millennial talent. Denver’s boom has strengthened its commercial real estate market – from office and industrial to retail and multifamily – buoyed by a 3.6 percent unemployment rate, the lowest in the U.S., according the U.S. Bureau of Labor Statistics. Today, over 75,000 people live in downtown Denver alone. Job numbers are at a historic high and are expanding across almost the entire spectrum – from leisure and hospitality to construction to professional and business services. The startup community is building and tech employment is growing; Moody’s reports that 7.9 percent of the total jobs in Denver are in the core tech sector. And all this growth has led to infrastructure improvements. The city has a dynamic and expanding transportation system (FasTracks) that recently opened a direct train line from Denver International Airport to Union Station, not only connecting the airport with the central business district, but also to the city’s massive light-rail system already in place. This multibillion-dollar transit expansion is one of the hallmarks of this city’s exponential growth. Companies and investors alike have taken note of the investment Denver has made in itself, creating ease with which people can and will navigate the entire metro area. The hub of this massive transportation system is downtown Denver. Currently, 88 total miles of rail connect into downtown Denver. This year alone brought transit from DIA, Westminster, Wheat Ridge and Aurora, all accessing the center of downtown Denver. The efficiency and mobility has permitted firms – for the first time in my 30-year career – to move from Boulder to Denver. Additionally, the abundance of labor provides employees the ability to live, work and commute into Denver’s CBD. Denver’s sustained prosperity has mitigated the impact of the slowdown of one of its largest industries – oil and gas. Rising oil and natural gas prices traditionally cultivated an active job market in our city but there are changes afoot. The plunge in oil prices of the world’s major energy cities has had a net-negative effect on the world’s largest energy-producing markets. As a group, these markets are experiencing slower economic growth, slower job creation and weaker office sector fundamentals. While office markets such as Moscow; Aberdeen, Scotland; Calgary, Canada; and Houston have faced significant headwinds due to the oil shock, our report “Occupier Research Report, Oil: the Commodity We Love to Hate,” indicates that office markets in energy-centric metros with more diverse economies, such as Denver and Dallas, have held up much better in the face of lowered pricing. In the United States, which is poised to surpass Saudi Arabia as the top-producing country globally, oil-centric markets led by Houston and Oklahoma City register some of the highest office vacancy rates in the nation. Denver has seen its office vacancy rate improve from 12.8 percent mid-2014 (when oil prices were booming) to 11.4 percent mid-2016 (post-oil-price correction). Since mid-2014, the Denver office market has absorbed 3.6 million square feet and has seen rents grow by 13 percent. Denver’s oil and gas industry accounts for approximately 23 percent of the office market within the approximate 28 million sf of total office space in the Denver CBD. In 1986, downtown Denver’s oil and gas companies accounted for 47 percent of the office tenancy and most exited the marketplace overnight, creating a glut of office space and a virtual ghost town for a number of years. The price of a barrel of oil at the time was $9 and over 65,000 people moved out of Colorado that same year. Today, oil and gas firms have put only approximately 924,000 sf of sublease space on the market. The oil and gas sublease space has been slow to move due to preferences for an open plan layout within the very active, creative and tech-user market that continues to migrate to Denver’s CBD. The Occupier Research report states that, barring a production freeze or unforeseen event, oil prices are expected to remain below $60 per barrel through 2017, and most experts forecast below $70 through 2020. The impact of a protracted low-oil-price scenario is mixed: energy-producing regions struggle while consumers and nonenergy producing markets benefit. While the positives from lower oil prices outweigh the negatives in terms of impact on global economic growth, the effects on the office market are more of a mixed bag, according to Kevin Thorpe, Cushman & Wakefield’s global chief economist. Most energy-producing office markets have seen economic slowing and lower occupancy levels, while stronger consumer spending has boosted occupancy virtually everywhere else, he said. For occupiers, the prolonged oil price rebalancing will create efficiency and cost-saving opportunities in some markets, but rental pressure in others. Layoffs within the energy sector were prevalent for a few quarters, but even that area has stabilized more recently. In spite of the recent pullback of oil and gas prices, the 924,000 sf of sublease space pales in comparison to the growth we have seen from other industries. Denver is supported by several thriving industries – tech, tourism, professional services – that have seen year-over-year rent growth accelerate to 7 percent in the second quarter of this year.