Is Denver’s Slow Office Absorption a Cause for Concern?

Denver is one of the fastest growing markets in the Western US, but office absorption rates fell in early 2018. According to a new office market report from Savills Studley, office absorption fell in the third quarter of 2018—fueled mostly by trend toward right sizing. Leasing activity was up from 1.9 million square feet to 2 million square feet, and vacancy rates of class-A space trended down 10 basis points to 18.6%. Rental rates, however, increased 2.4% overall and 2.3% for class-A space.

“The beginning of 2018 witnessed a slight slowdown in absorption, but a quarter-over-quarter analysis illustrates it has picked up since Q2,” Greg Bante, executive managing director at Savills Studley, tells GlobeSt.com. “A number of factors contributed to the lag, including tenants’ ongoing commitment to space efficiency and the trend toward densification, as well as the fact that tenants took a little longer to make decisions in Q1.”

Despite the anemic activity in the beginning of the year, tech sector growth continues to drive the Denver office market. Tech firms, like, Slack Technologies, are moving into and occupying space in the market. “Technology companies, whether startups or existing, continue to fuel the population growth and leasing activity in Denver and along the Front Range,” explains Bante. “Our talented workforce; international airport; work-life balance; affordability, when compared to the coasts; active lifestyle and excellent climate all contribute to Denver’s success and growth. The co-working industry’s explosive expansion in Denver, now over 2 million square feet, is a direct byproduct of the technology sector’s success, as co-working spaces offer the flexibility and timely delivery desired by fast-growing companies.”

Fueled by technology growth, Denver office fundamentals should continue to improve through the end of the year, and Downtown Denver will continue to be a popular destination for office tenants. “We anticipate that the technology industry will continue to thrive in Denver and along the Front Range, sustaining the market’s positive momentum,” says Bante. Tenants will continue to gravitate toward downtown and new construction here is leasing quickly. 2019 will deliver additional inventory and landlords/developers are seeing a lot of interest from prospective companies. Large space blocks in the Southeast market remain some of the only options for major users in the market.

While the office market has improved throughout the year, there are some concerns on the horizon. “In contrast, there is some uncertainty regarding the oil and gas sector, pending the outcome of Colorado Ballot Proposition 112, which proposes minimum distance requirements for new oil, gas and fracking projects,” says Bante. “If passed, it will negatively impact real estate in Colorado, especially Denver. We also expect a slowdown in leasing by co-working companies, a sector that has been expanding.”