CREJ - Office Properties Quarterly - September 2017
Recent trends signal a demand shift to suburban office properties from urban locations as net absorption continues to outpace supply. Nationally, vacancy in the central business district office space has begun to rise, slowing rent growth. On the other hand, an increasing pace of net absorption of space in the suburbs is tightening vacancy and maintaining healthy rent improvements. These suburban office properties benefit from forward-looking demographics. In 2015, the majority of U.S. households, 64 percent, resided in the suburbs and that number should rise as urban millennials form families and move to larger living spaces in suburban locations. Many office tenants are tapping into this larger workforce already located within the suburbs, enticing employees with revamped offices. In an effort to recruit and retain employees, suburban tenants have been scouring the market for quality available space in locations near retail and transportation options. As a result of this robust tenant demand, suburban vacancy has fallen roughly 300 basis points during the course of the recovery to 14.7 percent in the second quarter. Subsequently, suburban office construction has heightened during the last two years but remains far below the deliveries recorded during the previous cyclical peak. Minimal completions and steady absorption signal the potential for further suburban vacancy improvement. The healthy demand also has spurred rent growth; the average asking rent is up 9 percent from the 2008 peak. Asking rent is roughly half of the average rent in urban office space, motivating tenants who may have been priced out of the urban core to move to the suburbs. The lower costs and availability of more land in the suburbs have resulted in the creation of large campuses catered to professionals. Many of these campuses offer on-site amenities like gyms or daycare centers, helping create a work-life balance many professionals desire.
In Denver, a steady pace of hiring underpins office space demand. During the previous 12-month period ending in June, metro employers created 28,700 jobs, up 2 percent year over year and outpacing the U.S. rate of growth. Office using employment moderated during this time but is expected to rise 1.9 percent at year end. Job growth and strong net absorption of office space has lowered office vacancy 50 basis points during the last four quarters to 14.7 percent, the lowest rate this cycle. Unlike increases in national urban vacancy, downtown Denver recorded a 100-basis-point decrease in the rate since last June. Suburban demand also remains strong as several submarkets in the suburbs posted declines greater than 100 basis points. These submarkets include North Denver, Parker/Castle Rock and West Denver. Tightening vacancy metrowide and demand for quality office space has sparked a rise in office construction, with completions more than doubling from the prior year. The majority of deliveries will be located within the suburbs along major transit routes as workers seek shorter commute times and walkable access to public transportation. To meet the public transport needs of residents, three FasTrack lines have opened since 2016, along with the Flatiron Flyer Rapid Bus Transit Service, connecting numerous neighborhoods and expanding commuting options. This year, nearly a third of all completions will be located within a half-mile of the E, F and R lines in southeast Denver, highlighting demand moving into the suburbs. Notable deliveries in the area include the 227,000-square foot Panorama Corporate Center and the 212,000-sf Inova Dry Creek 1, which are both fully leased and were completed during the first half of the year. The heightened pace of construction will not hamper vacancy improvement this year as demand keeps up with supply. Vacancy will tick down 10 basis points to 14.9 percent by year end, contributing to a modest increase in the average asking rent.