Denver Commercial Real Estate Market Report 2011

Denver CRE Market Report—First Half of 2011

The Denver economy experienced relatively strong job growth in the last 12 months through April 2011 with approximately 6,600 new jobs created. Unemployment rests at about 8.1% through April 2011, which is down from 8.6% from a year ago. The forecast for the Denver office market is seen as steady improvement as the national economy continues to heal.

Absorption

DirecTV signs 66,000sf lease at
6550 Greenwood Plaza Boulevard

The office market experienced modest, but positive absorption with 94,000sf in the 2nd quarter of 2011. Although the 1st quarter of 2011 was much more robust with 298,000sf of positive absorption than the 2nd quarter of 2011, the year-over-year comparison was positive absorption 392,000sf in 20011, compared to negative 229,000sf in 2010. The Aurora/Northeast submarket experienced approximately 166,000sf of absorption in the first half of 2011, while Denver’s CBD experienced 135,000sf and West Denver saw 108,000sf of positive absorption. Rents and vacancy remained relatively stable in Q2, while sublease space in the metro Denver market decreased by approximately 104,000sf in the 2nd quarter. There is approximately 894,000sf of sublease space on the market. One notable transaction in Q2 was the 66,000sf DirecTV deal in Greenwood Village.

Vacancy Rate

The vacancy rate in Denver dropped slightly to 13.7%, compared to the 14.6% vacancy in the 1st quarter of 2010. The vacancy rate in the CBD was approximately 12.8%, while the Denver Tech Center hovered around 14.4%. Boulder experienced the most attractive vacancy rate at 10.3%. Some economists think the vacancy rate will continue to decline through the remainder of 2011 and into 2012, because of the lack of new supply coming to market.

Rental Rates

The asking rental rates for office space have remained relatively stable in the first half of 2011. Although Class A office assets experienced a moderate increase in asking rents, landlords are still providing concessions to lure tenants to their buildings. Economists do see asking rents appreciating through the remainder of 2011 and into 2012, because of the lack of new construction in the pipeline. As a result, the strengthening market will likely lead to landlords offering fewer concessions for the remainder of the year.

Investment Sales

1800 Larimer Street sold for $430sf

The Denver market logged approximately $638 million in investment sales activity for the first half of 2011. In the first half of 2010, investment sales activity recorded only $166 million. Given the uptick in investment sales activity, some economists predict the 2nd half of 2011 to experience additional transactions and modest growth. Although there has been an increase in activity, the average investment sale price has decreased year over year. In the first half of 2011, office assets were trading at approximately $146sf, compared to $164sf in 2010. A noteworthy transaction was the acquisition of Tuscany Plaza by Cornerstone for $47.1 million, $182sf. One other notable transaction was the acquisition of 1800 Larimer Street by Invesco Real Estate for $213 million, $430sf. As 2011 marches on, the office market in Denver will likely see an appreciation in values as demand picks up and access to credit improves.

Conclusion

The Denver office market will continue to heal and most likely will continue to see modest improvements. As the unemployment rate continues to subside, the demand for office space will resume its positive trend. Asking rents will continue to stabilize and appreciate modestly, while aggressive concessions once offered by landlords will abate.  As the Denver office market continues to convalesce, tenants still have the upper hand. Landlords are still offering attractive concessions, free rent, and favorable terms, but the trend may soon change as demand picks up. It is a great time for tenants to renegotiate or extend their lease, or move into better quality space before the tides change in favor of landlords.