As of 23Q3, Denver ranks among the worst-performing office markets in the U.S. with a vacancy rate of 16.1%, surpassing levels reached during the Great Recession and the dotcom bust. Many occupiers looking to offload space are offering substantially discounted space on the sublet market to attract prospective subtenants. The difference between average asking rents for direct space versus sublet space has reached its widest delta on record, at just over $9/SF. By comparison, entering 2020, the difference was less than $2/SF.
The market continues to face demand challenges stemming from the low office utilization that has prevailed since early 2020. But the impact of this shift is variable. Denver has a high concentration of older buildings, which have borne the brunt of softening demand as tenants are demonstrating an appetite for newer space. Buildings built prior to 2000 have recorded over 2.6 million SF of negative net absorption in the past year, and vacancies have steadily climbed to 16.6%. While vacancy tends to fluctuate in newer buildings due to unleased speculative projects delivering to the market, vacancies in buildings built after 2015 have steadily declined in the past year as this vintage has recorded nearly 1 million SF of positive net absorption.
Developers are hoping to capitalize on the current trend of tenants preferring space in newer, more amenitized buildings. There is roughly 3.9 million SF under construction, the highest level since 2017. Along with vintage, location has played a key role in driving demand. Two development hotspots have emerged across the Denver market, each telling a different story based on the tenant industries they attract.
Roughly 1 million SF is under construction in the RiNo neighborhood, located within the Platte River Submarket. This younger, grittier section of Denver that has experienced explosive growth over the past decade typically attracts creatives and tech startups that are now reducing their footprints as they look for ways to cut costs. Vacancies are trending above the metro average, and only 17% of the space under construction is preleased.
Conversely, Cherry Creek typically attracts more established banks, small energy companies, and law firms. These types of tenants are upgrading their office spaces to aid in recruitment and retention. Vacancy in the submarket diverged from the metro trend in 2021 and, at 6.1%, is now nearly 900 basis points lower than the Denver office average. Of the 300,000 SF that is under construction, 80% is preleased.
Office transaction volume has slowed considerably since early 2022 amounting to just 20% of the long-term average for the past three consecutive quarters. 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 to record levels and banks tighten lending standards. Traded properties since the beginning of 2022 averaged a 90% occupancy rate, demonstrating investor appetite for cash-flowing assets.
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