Demand for office space in Denver remains subdued as companies reassess their office footprints ahead of a potential economic slowdown. A high concentration of tech companies has made Denver even more susceptible to office downsizing as they look for ways to cut expenses in lieu of reducing staff that was difficult to secure amid ongoing labor shortages. In terms of net absorption as a share of inventory since the start of the pandemic, Denver ranks among the worst-performing office markets in the U.S., and the vacancy rate has surpassed Great Recession levels.
Office availabilities have reached an all-time high, giving tenants in the market plenty of options. Competition from developers has been ongoing amid Denver’s building boom of the last decade, but Landlords are now facing competition from existing space as well in the form of sublet listings. Many companies looking to offload space are cutting prices to attract prospective tenants, and the difference between average asking rents for direct space versus sublet space has reached its widest delta on record, at just over $9 per square foot. Entering 2020, the difference was less than $2 per square foot.
Still, bright spots have emerged. A number of professional services companies are demonstrating a flight to quality. Law firms in particular are on the move, targeting best-in-class office space in the downtown area to aid in recruitment and retention. Cherry Creek, an area known for its upscale developments, is one of the only submarkets across Denver to maintain positive net absorption, and rents have outperformed here relative to the metro average. The submarket has a high concentration of 4 & 5 Star assets, allowing landlords in the area to capitalize on flight-to-quality trends.
New development has pulled back amid the uncertain environment. After a decade of explosive growth, Denver’s development pipeline has fallen off the list of top markets, on both a nominal basis and as a percent of inventory. The projects that are coming online soon, though, could benefit from flight-to-quality trends as tenants are willing to pay top dollar for amenities that promote health and safety and attract top talent.
Investment activity took a step back in recent quarters amid ongoing uncertainty. Vacant value-add assets, once a means for investors to enter the Denver office market without paying sky-high prices, have fallen out of favor as available space continues to climb and banks tighten lending standards. However, trophy assets in prime locations like Cherry Creek continue to see robust pricing.