ACTIVITY: Office Leasing Declines in Q3 2023
Office leasing activity decreased in the third quarter 2023, totaling 1.3 msf, marking a 9.9% decrease in leasing volume QOQ. This decline in activity, when compared to previous periods, can be attributed to shifts in tenant behavior driven by uncertain economic conditions and ongoing assessments of the hybrid-work model. However, when measured against the third quarter 2022, Denver Metro’s leasing activity demonstrated substantial growth, up by 38.2% YOY. Class A space accounted for approximately 675,900 sf or 52.0% of the activity, while Class B represented just over 529,500 sf (40.7%). Notably, the quarter’s most significant new lease was secured by Bet365, leasing 119,300 sf at 1701 Platte Street.
ABSORPTION: Net Absorption falls slightly as Tenants Continue to Vacate or Downsize
The third quarter 2023 recorded nearly 1.2 msf of negative net absorption across the Denver Market, marking the fourteenth consecutive quarter of negative absorption. This represented a 20.0% decrease in negative net absorption when compared to the previous quarter, but a notable 21.9% increase on a YOY basis. The negative absorption can be largely attributed to a considerable number of tenant departures and downsizing, reflecting a broader trend, especially in the CBD where tenants are opting for smaller yet higher-quality spaces. One of the largest tenant move-outs during the quarter was Kaiser Permanente, vacating 142,000 sf at 9800 South Meridian Boulevard.
CONSTRUCTION: Office Building Delivers in Cherry Creek
The 200 Clayton Street project was completed in the third quarter 2023, unveiling 77,000 sf with a project that had been in the under-construction phase since 2021. Cherry Creek continues to perform well despite the low vacancy rate and increasingly limited supply. Construction activities primarily remained concentrated in the urban core, with three buildings totaling 642,000 sf under construction in RiNo and 704,000 sf under construction in LoDo. Beyond the core, the sole submarket with active construction was Cherry Creek, boasting approximately 289,500 sf that is currently underway. However, there were no new projects that broke ground during the quarter, and the majority of the projects currently under construction are slated for delivery in either 2024 or 2025.
- Office leasing remains under pressure with continued challenges on leasing activity for the foreseeable future. Tenants continue to display hesitancy towards signing new leases, particularly for extended durations, and remain cautious about expanding their operations until market and economic conditions stabilize.
- Sublease availability continues to be substantial, and since many sublessor tenants have expressed no intentions to return, a portion of this availability is expected to convert into direct vacancy in the upcoming quarters.
- Flight-to-quality continues to favor Class A product, as tenants are choosing newer buildings that are equipped with better amenities.
- The absence of new activity in the office construction pipeline persists due to the high cost of capital and ongoing economic uncertainty. The difficulty in securing debt financing is anticipated to extend the period of reduced activity in the coming quarters.