Denver, Colorado 
Real Estate Information and Helpful Links! 

IS THE OFFICE MARKET FINALLY TURNING AROUND?

Denver's office market decline during the 1980s was the single most visible symptom of that decade's economic woes. Combined with severe overbuilding, the energy industry contraction devastated the metro office market. Things were much changed during most of the 1990s as Denver's economy expanded and demand for office space drastically reduced vacancy rates. The amount of speculative space started, at least until recently, was also well under control.

However, in 2001 the national economy took a one-two punch with the high-tech bust and 9/11 once again stunning the office market, but as the national and local economies begin to recover, office investors are hoping that glimmer they see is the light at the end of the tunnel. Employment losses overseas have gotten big press but were later put in perspective, so perhaps the office market is finally bouncing off the bottom.
At the end of 2003 Frederick Ross Co. reported a 22.7% office vacancy rate metro area wide, the highest since 1991 on a total inventory of some 84 million square feet. The vacancy rate is somewhat inflated, however, by the inclusion of sublease space. This type of space may be physically vacant but it is economically occupied, since the tenant continues to pay rent even if the space is unused. Of Denver's seven office submarkets, only two recorded positive net absorption during 2003.

According to Frederick Ross Co. absorption during 2003 totaled 441,000 SF causing vacancy to decrease slightly from 23.2% at year-end 2002 to 22.7% at year-end 2003 but up from just 9.0% at the end of 2000. Ross reports that effective median rental rates declined by about 20%, with greater declines in the northwest and southeast suburban submarkets. Much of the increase has been concentrated in new Class A buildings and in formerly single tenant buildings, especially in the US-36 corridor in the northwest suburbs and along the I-25 submarket in the southeast.

According to the James Real Estate Services quarterly survey of office space during 2003 developers completed 14 new office buildings with a total of 1.7 million SF up slightly from 16 buildings during 2002, containing 1.5 million SF. Most of the new construction brought online in 2002 was located in the already-overbuilt northwest, southwest and southeast suburban submarkets. Most of the 2003 completions are small buildings dispersed throughout the metro area with the only large buildings being Legacy Plaza at 285,000 SF in LoDo and Lockton Center at 125,000 SF in Greenwood Village. Starts were much less in 2003 at 940,000 SF and 13 projects are under construction going into 2004 with a total of 965,000 SF again distributed throughout the metro area. Proposed office buildings total some 1.6 million SF in 17 projects, but many will, of course, be delayed until the market improves.

During 2001 nearly four million SF of sublease space was brought onto the market, primarily in the northwest and southeast suburban submarkets. During 2002 the amount of sublease space vacant declined slightly to 3.7 million SF. During 2003 the total amount of sublease space available was down to 2.85 million SF. Sublease space was brought back onto the market due to mergers, companies going out of business or consolidating operations into smaller quarters. This phenomenon is particularly evident in the high tech sector of the local economy. Some improvement is now evident as companies remove sublease space from the market, probably in anticipation of business expansion during the next several years.

The office market in the southeast suburbs and elsewhere is reminiscent of the 1980s, with a few exceptions. For one, most tenants are not looking for marquee space. They want an image that conveys fiscal responsibility. Today's office buildings are also being built with redundant power, fiber optics, cable trays, uninterrupted power supplies, and greater air conditioning volume to diffuse the heat produced by electrical appliances. Businesses are also pursuing cost savings by packing their office space more densely with employees, which requires more flexible floor layouts and more parking spaces; in most cases, 5 per 1000 SF.

By upgrading the functional elements that tenants need, while avoiding ostentatious building materials, developers have been able to keep costs more competitive with existing buildings. In recent years, new flex and single-story office buildings were built to meet the demand of tenants leaving the office towers in search of cheaper rents. The demand for the lower-cost buildings, which do not have such amenities as elevators and lobby areas, is expected to grow as the office market recovers.