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Denver Office Market Sees First Quarter of Positive Absorption in Two Years

According to Newmark’s newly-released Q1 2022 Denver Office Market Report, with the new year and the
pandemic numbers continuing to drop, employers have once again started to set plans for returning employees to the office. Office activity in Denver has picked up across all submarkets and industry types, although medium- and small-sized tenants remain the most active and engaged.

Quarterly net absorption was 215,897 square feet in the first quarter with net positive absorption in two years. Vacancy still rose slightly to 21.6% from 21.4% in the prior quarter due to new vacant product added to the market, up 260 basis points from 19.0% one year ago. As the flight to quality continues, Class A buildings posted the strongest absorption, while Class B conversely saw a decrease in occupancy.

Current Conditions

– Quarterly net absorption of 215,897 SF
– Vacancy rate of 21.6%
– Both Class A and Class C logged positive absorption
– Median asking rent (Price/SF) is $30
– There is 4.0 MSF of available sublease space in the Denver market with 2.3 MSF of it vacant. While available sublease space increased from the previous quarter, the total amount vacant continued to decrease.

Submarket Activity

Five of Denver’s nine submarkets posted substantial positive net absorption for the first quarter of 2022, with Southeast Suburban (SES) posting the largest with 514,230 square feet. The Aurora and Southwest submarkets recorded relatively flat quarterly net absorption. Most landlords continue to hold firm on asking rates since the end of 2021 but the increase in taxes has pushed the median direct full-service gross asking rates up year-over-year in five submarkets. Some landlords in select areas, like Cherry Creek, are even beginning to successfully push rates, especially for new construction. Negotiating power remains on the tenant side throughout the overall market, with many asking for multiple concessions from landlords who are resistant to lowering rental rates.

Construction Pipeline Returns to Healthy State

No new construction was completed in the first quarter of 2022, but four previous owner/user buildings were converted to multi-tenant, including two in SES that provided much of the submarket’s absorption this quarter. Seven projects, totaling
967,948 square feet, are currently under construction or renovation. Four of those projects are under construction in the
Downtown submarket: One Platte (250,00 square feet); the Current (238,000 square feet); T3 RiNo (214,000 square feet); and Emily’s Office (the 43,000-square-foot renovation/conversion of the former Emily Griffith school). In the SES submarket, Vectra Bank has decided to make 25.8% of its 130,000-square-foot build-to-suit (BTS) available for lease by other tenants; the project is due to deliver at the end of 2022.

Looking Forward

As 2022 progresses, Denver’s office sector improving deal flow is expected to forge ahead as companies that put their search for new space on hold due to uncertainty will once again need to make long-term office decisions and will reengage their searches for office space that best suits their new requirements. The flight to quality will persist for Class A and Class B tenants as many companies will hope to entice employees back to the workplace. Rental rates will continue to increase, mostly due to the increased operating expenses and taxes, although landlords of top-quality space will test pushing rates as interest will remain high. Sublease space will keep gradually decreasing from the high point in 2020, although plug-and-play space will remain an attractive option for companies looking for quick occupancy. Vacancy will level out in the second quarter of 2022 due to the new and delayed move-ins, while the newly marketed vacancies will largely come from companies downsizing, rather than tenants leaving the market. Job growth is expected to maintain through the next several years, and the anticipated pent-up demand for high-quality space in select markets, combined with a restrained development pipeline will result in positive absorption in the next quarter of 2022.

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