1st Qtr. 2021 Office Reports

The Denver office market entered the pandemic on solid footing. The market has benefitted from the in-migration and relocation of companies to the area, particularly from technology companies fleeing expensive office space in the coastal markets. Job and population growth have been robust in the past decade, driving strong absorption gains, rent growth, and development activity in the office market.

But Denver’s story of growth has not insulated it from the effects of the coronavirus pandemic, which continues to weigh on the office market as tenants hold off on making long-term decisions amid the uncertain environment. Additionally, oil prices hit all-time lows in April from decreased demand for fuel worldwide, and several energy firms in Denver were forced to file for bankruptcy or conduct layoffs.

Deal volume fell significantly in the second quarter as office tenants turned their attention to accommodate a remote workforce. This wait-and-see approach persisted through the remainder of the year, and leasing activity in the last three quarters of 2020 declined by roughly 50% as a result. The market recorded 5.6 million SF of leasing activity last year, which is similar to what was recorded during the height of the Great Recession.

Vacancies were already creeping up before the pandemic, but the shock to the local economy only made matters worse, as 3.6 million SF of space was vacated in 2020. In addition to direct space hitting the market, sublet availabilities are also posing a challenge to Denver’s office market. The year ended with 4.5 million SF of available sublease space, an all-time high in Denver.

Sublease availabilities are mainly concentrated in \Downtown, where oil and gas tenants occupy roughly 15% of office space. Prior to the pandemic, merger and acquisition activity in the oil industry meant that large blocks of space were already being placed on the market, but energy tenants began listing their space in earnest last year with the additional challenges brought
on by the pandemic.

Softer demand and a wave of speculative construction delivering in the coming quarters have vacancies rising in the forecast, which will continue to shift leverage back to tenants in the near term.

The immediate aftermath of COVID-19 shutdowns made it more challenging for investors and lenders to underwrite deals. After a dismal second quarter, investment activity did pick up in the second half of the year, with large institutional investors returning to the market. The uptick in investment activity in the second half of the year helped to drive up total annual leasing
volume. Denver turned in a respectable year, with annual sales activity totaling nearly $2.4 billion in 2020. Although this is down from 2018 and 2019, it far exceeds what was recorded during the Great Recession. Denver’s office market is in a period of heightened volatility, but there are reasons to be optimistic about its long-term health. Denver has enjoyed some big wins this year with the relocation and expansion of companies, and the market continues to diversify with the emergence of the tech sector’s footprint in the local economy.

Source: CoStar

2021-03-16 Office