Demand for office space in Denver remains depressed due to the normalization of remote and hybrid working initiatives, driving up the amount of available space to historic highs. After unsuccessful attempts to lure employees back to the office, many companies are reassessing their office footprints and sublease inventories continue to track at record levels. Due to the fundamental shift in how and where employees work, CoStar is anticipating increased downsizing and more subdued net absorption in the long term.
The risks are clearly evident for both the short- and long-term. The high concentration of tech companies, many of which are more amenable to remote work, have made Denver even more susceptible to this trend that is sweeping the nation. 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. Economic headwinds could further delay the office sector’s recovery. The likelihood of a recession continues to increase, which will weaken demand for office space as companies look for ways to cut expenses.
Still, bright spots have emerged. A number of professional 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. In downtown, office utilization as of November 2022 reached 52% of 2019 levels, according to data from the Downtown Denver Partnership.
Denver’s office market is supported by a diverse mix of industries, including tech companies, oil & gas firms, aerospace and defense contractors, and healthcare providers. These companies have led the charge in hiring, and Denver’s employment market is now above pre-pandemic levels. Ten tech startups achieved unicorn status in 2021, meaning that a privately held company has reached a valuation of at least $1 billion. A core of young, highly-educated workers populates the Mile High City, which plays a vital role in drawing the metro’s high-paying employers.
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 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.