Denver Office Market Struggles Through Pandemic

The Denver office market has struggled through the pandemic. The latest stats from Savills’ third quarter report show that leasing activity has fallen by 1 million square feet, the lowest point in a decade, and 1 million square feet of sublease space has come to the market, bringing the total to 4.6 million square feet. In addition, the office vacancy rate in the market has increased to 21.6%, the highest in eight years.

“We see the availability rate as a more useful metric, that includes all sublease space and new buildings that are under construction,” Rick Schuham, director at the Denver office at Savills, tells GlobeSt.com. “That number for downtown Denver is 27.5% and that is what tenants care about. What are my choices? What can I negotiate a lease on? The vacancy number is relevant for both landlords and investors and that is why our competitors are tied to that metric.”

In many cases, this is good news for tenants, who have ample options and room for negotiation on lease terms. “I had an out-of-town client that recently came to Denver to look at options that would provide space for 200-500 jobs,” says Schuham. “This specific client only wanted to look at sublease space and we had 19 unique locations to view. In many cases, it was suggested that we could write our deal as we saw fit. This availability puts pressure on all categories of space owners both direct to landlord and sublease.”

Downtown Denver has the highest vacancy rate in the market at 27.5%. In addition, the market has nearly half of the sublease space in the greater market at 2.1 million square feet. Companies across the board are placing sublease space on the market. “There is no limitation on sectors that are experiencing pressure downtown,” says Schuham. “Largely it is the energy and tech sectors that are putting their space on the market.” Downtown Denver has a high concentration of energy business and technology business, which are driving the sublease supply. In addition, the submarket has several large developments that are delivering downtown mostly unleased.

While the vacancy rate in the market has skyrocketed, rents have not meaningfully adjusted yet. In fact, according to the report, overall asking rents increased slightly to $29.83 per square foot from $28.18 per square foot. “We have seen some adjustments. Concessions are up substantially, and in many cases, rents are already down. Asking rates and taking rates are quite different,” says Schuham. “Tenants who have the flexibility to make decisions and are financially capable are in control.”

There won’t likely be a change in these trends through the end of the year. Schuham predicts limited activity. “Only the clear visionaries are making big-picture real estate decisions and they are being handsomely rewarded with long-term low occupancy costs,” says Schuham. “We will continue to see more companies kicking the tires for relocating to metropolitan Denver from the coasts and large urban centers across the country. The pandemic has changed everything, not just for decision makers, but more importantly the broader educated skilled workforce. Quality of life and access to the outdoors has never been more important. Colorado checks all the boxes.”