CBD – Central Business District
Denver’s CBD has been significantly impacted by the coronavirus pandemic and subsequent hybrid work models. Leasing activity fell dramatically at the onset of the pandemic as tenants held off on making long-term lease decisions in the uncertain environment. This wait-and-see approach persisted through the remainder of 2020 and into 2021. With weaker demand, vacancy is up to 22.5%. In addition to direct space hitting the market, sublet availabilities are also posing a challenge to the CBD. Available sublease space in the CBD has doubled in the past year to 1.6 million SF. While office fundamentals in 2020 softened, investors demonstrated long-term confidence in the downtown market with a handful of trophy assets that traded. Annual sales activity totaled nearly $862 million in 2020, up from $564 million in 2019. Denver’s Central Business District is the metro’s financial hub and includes the headquarters of many of its larger companies. The submarket is served by several light-rail stops in the Regional Transit District (RTD) system and is positioned to benefit from the FasTracks extension that has increased access to the Southeast, DIA, and East Denver submarkets.
LoDo – Lower Downtown
LoDo is Denver’s oldest neighborhood and a premier live/work/play destination. Before the pandemic, demand in this slice of the market was driven by employers utilizing highly amenitized workspaces to attract top talent in a competitive labor market. Foot traffic in the area decreased significantly at the onset of the pandemic, but is beginning to improve as people return to the office.
The effects of the coronavirus became immediately apparent in LoDo’s office market fundamentals. Vacancy quickly increased as a number of tenants placed space on the sublease market or backed out of lease deals that were in the works. Absorption turned negative, and a lack of leasing activity throughout 2020 and into 2021 indicates that these space losses won’t be recovered anytime soon. Rent growth has declined since March of last year, and CoStar’s forecasting model indicates that rents are projected to contract until mid-2023.
While this may sound like a gloomy scenario, some tenants are taking advantage of the current economic conditions to lease office space at a discounted rate. LoDo’s tenant base remains well-diversified, with a heavy flow to tech, investment, law, and even medical service tenants taking space in recent deliveries.
Investors have made big splashes when opportunities present themselves, but trades have varied widely in any given year.
Platte River/RiNo (River North)
Denver has experienced incredible growth in the past decade, and no place is this boom more evident than in Platte River. The submarket encompasses Denver’s fastest-growing neighborhoods, including Union Station and RiNo, where extensive revitalization has been ongoing.
With opportunities for large-scale development few and far between in the neighboring LoDo Submarket, development accelerated to staggering levels in Platte River in recent years. The supply wave began radically altering the landscape of the submarket. Another 530,000 SF is currently in the pipeline.
With much of the recent development speculative, the vacancy rate has fluctuated significantly. Ongoing supply pressure, coupled with tempered office demand in the wake of the pandemic, contributed to vacancies above the submarket’s long-term average recently.
Demand for new construction was nothing short of impressive in past years. Additionally, rents were recently growing at their strongest rate in several quarters, following a multi-year stretch of pronounced underperformance against the metro. Platte River has managed to maintain positive net absorption in the last 12 months, when most other submarkets across the Denver market have reported space losses amid the ongoing pandemic. These trends speak to sustained demand from tech tenants, a key sector in the Platte River Submarket.
Cherry Creek is one of the most popular neighborhoods in Denver. The area offers a live/work/play environment and has become synonymous with fine dining and high-end shopping. The COVID-19 outbreak momentarily dampened the appeal of these attractions, but the successful roll-out of the vaccine has resulted in improving office fundamentals midway through 2021.
Prior to the outbreak, office demand was consistently outpacing the pace of development, particularly on the high-end of the spectrum. Vacancies in 4 & 5 Star product compressed by more than 500 basis points in 2019. These outsized figures offset rising vacancies in 1 & 2 and 3 Star properties.
After years of healthy rent hikes, rent growth slowed throughout 2020 as the pandemic weighed on office fundamentals. As of 21Q3, annual rents contracted by -0.7%.
Only a handful of office buildings exceed 100,000 SF, most of which was built in prior cycles. The submarket is near full build-out, limiting development opportunities to smaller infill projects (relative to construction in nearby downtown).
The Glendale Submarket has traditionally served as an affordable option to the nearby Cherry Creek Submarket, which is one of the most desirable and expensive locations in the Denver market. But recent mixed-use development in Glendale has transformed nodes throughout the submarket into live/work/play hotspots in their own right. Boulevard One has turned the former Lowry Air Force Base into a community with housing, retail, restaurants, and office space, while 9th & Colorado features a walkable mixed-use development on a site that was once Colorado’s Health Sciences Center campus.
More development is on the way, which will continue to transform this once sleepy area of Denver. After years of setbacks, Glendale 180 finally got the green light. This $150 million entertainment district at Virginia Ave. and Cherry Creek Blvd. will feature a music concert venue, movie theater, restaurants, and a hotel, and is scheduled to break ground this fall. While office space will likely not be part of the district, it represents an evolution of Glendale that will aid in attracting prospective tenants to the area.
New developments in Glendale are adding vibrancy to the submarket, but they’re also raising the vacancy rate. Vacancy hovered around 8% from 2014-2019 but has doubled to 15.6% in just the last 2 years. Vacancy is especially high in the newer 4-5 Star rated properties. The impact this is having on rent growth is clear. Year-over-year rent growth is down -1.7% as of 21Q2 and will likely continue to contract over the next four quarters.
Adjacent to Cherry Creek and located within close proximity to downtown Denver, Colorado Blvd/I-25 is a more mature submarket that offers rent savings compared with the metro average. More than 75% of the inventory is located within one mile of a light rail station (generally the Colorado Station stop), which now grants more access than ever thanks to a major ongoing expansion to Denver’s light rail network elsewhere in the metro.
The Colorado Blvd/I-25 Submarket offers a discount on rents relative to the Denver average. While rent growth has cooled following the onset of the pandemic, the submarket’s relative affordability helped to prevent the steep losses that were recorded in Denver’s expensive urban core. Demand remains tempered for office product, and rents are not projected to recover until at least 2023.
The submarket overwhelmingly attracts tenants in the professional business services or financial sectors, which combined represent more than 80% of the submarket’s occupied space. Metro wide, these two sectors are responsible for just over 60% of occupied space.
SOUTH DENVER METRO
DTC – Denver Tech Center
The Denver Tech Center (DTC) is one of the metro’s primary employment clusters. The submarket has evolved into a sprawling urban node with a diverse mixture of tenants, but it still remains a hub for technology companies, particularly those that specialize in telecommunications. DTC has three light rail stops located within the submarket, making it a prime location for transit-oriented development. Because of the new mass transit options, the submarket has transformed in the past decade from a commuter office park to a vibrant mixed-use development. Leasing activity and speculative development have largely been put on hold due to the coronavirus pandemic. However, build-to-suit activity continues. Vectra Bank broke ground on its new corporate campus in 20Q4.
Several recent move-outs and a construction delivery put upward pressure on vacancies, which peaked at 17.2% in 20Q3. The vacancy rate has since fallen to 16.8% in 21Q3.
The average rent in Denver Tech Center historically mirrors the metro average. Like most of the metro, annual rent growth moderated in the submarket in 2020 and into 2021.
Investors seeking to enter Denver’s robust office market without paying sky-high prices in the urban core often look to DTC and the greater Southeast Suburban Corridor. Sales volume reached a cyclical-high in 2019, and the average transaction price per SF was a fraction of those in downtown submarkets. Out-of-state players made the biggest splashes, targeting 1980s and 1990s vintage product with higher occupancy rates. Deal volume fell significantly at the onset of the pandemic, but investors appear to have returned to the DTC submarket with a number of major sales closing in 2021.
Greenwood Village is one of Denver’s premier office hubs. It is surrounded by some of Denver’s wealthiest zip codes, providing a strong base of highly skilled workers for companies to draw from. In the city of Greenwood Village, about 75% of residents have a bachelor’s degree or higher, and nearly half of this cohort has a graduate or professional degree. The median household income is about $130,000.
Office rents in the Greenwood Village Submarket were decreasing at a -0.4% annual rate during the third quarter of 2021, but have posted an average annual gain of 1.9% over the past three years.
While 13,000 SF has delivered over the past three years (a fractional expansion of the existing inventory), nothing is currently underway.
Vacancies are trending upwards as the pandemic eats away at office demand.
Investors seeking to enter Denver’s robust office market without paying sky-high prices in the urban core often look to Greenwood Village and the greater Southeast Suburban Corridor. Deal volume fell significantly at the onset of the pandemic, but investors returned to the submarket with a number of major sales closing in the last 12 months.
Located in the southeast suburban area of Denver, Inverness has been a popular location for large corporate users due to the submarket’s access to a strong base of highly skilled workers, relative affordability, and multiple transportation options. Technology, finance, and healthcare companies are prevalent throughout this submarket: DirecTV, Comcast, and ViaSat have a large office presence.
Office fundementals were already slowing in the Inverness submarket before the pandemic. Several large blocks of space (or entire buildings) became available in 2019, as tenants such as AECOM and Arrow Electronics moved to new construction in nearby submarkets. Leasing activity slowed even more throughout 2020, which affected net absorption and reduced the leverage landlords have to raise rents, at least in the near term.
Major office developments have been limited in the past decade, with the majority of construction activity taking place in the neighboring Denver Tech Center submarket. No office projects are currently in the works, which could help the recovery of fundamentals going forward.
Investors have been increasingly drawn to the southeast suburban area of Denver and have seized opportunities that come available in the Inverness submarket. After a slow 2020, investment activity has already picked up in 21Q1 with the sale of INOVA Dry Creek 2 for $63.2 million.
NORTH DENVER METRO
Speculative development was virtually nonexistent throughout this past cycle, but a pair of developers have decided to test the waters, albeit on a smaller scale. City Street Investors delivered a mixed-use project named LoHi offices in October with about 30,000 SF of office space and around 5,000 SF of ground-floor retail. Several blocks away, a spec office project called Firehouse has about 10,000 SF available office space is scheduled to complete later in 2021.
Rent growth moderated in Northwest Denver in 2020, and that continued into 2021. But the slowdown was less pronounced than the metro at large, as the submarket’s stock is relatively less exposed to the uptick in speculative development metrowide that has weighed down rent growth for high-end office space.
Recent expansions to Denver’s light rail network have notable implications in parts of the submarket, both for new development and the existing inventory. With the recent opening of the G-Line, one-third of submarket stock (about 2.2 million SF) is now located within a mile of a light rail station.
The Broomfield submarket is located roughly midway between Boulder and Downtown Denver. Its highly rated school system, abundance of work opportunities and recreational activities make it a sought-after area for residents and businesses alike. Broomfield is one of the main suburban tech hubs in the region, but a long list of companies in various industries drive the local economy. Several major office hubs exist in the area and various arterial highways make for an easy commute for the high number of well-paid residents in the area.
While fundamentals have been healthy in the past, several large move-outs in recent years put upward pressure on vacancies. The vacancy rate stands at 12.7% in 21Q3, up from its low point of 6.5% in 19Q2. Rent growth was slowing even before the outbreak, and moderate rent losses are expected as tenants continue to evaluate office space requirements amid the growing popularity of hybrid work models.
The Boulder Submarket in Boulder is a very large submarket that contains roughly 12.7 million SF of office space. The vacancy rate has risen significantly over the past 12 months, and at 11.8%, the rate is the highest it’s been in over a decade.
Annual net absorption came in at a decrease of 340,000 SF over the past year. The story improves over a longer timeframe: Over the past five years, the submarket has posted net absorption of about 32,000 SF per year, on average. Rents fell by 1.3% over the past year. Things look much better on a longer timeframe, however, as rents have increased at a rapid clip of 4.1% annually on average over the past decade.
The 150,000 SF currently underway in Boulder is the lowest construction count in more than three years. This represents a continuation of new development in the submarket, which had already seen 530,000 SF deliver over the past three years, representing an inventory expansion of 4.4%.
Office properties have traded with regularity in recent years, and last year, the number of sales significantly exceeded the three-year average. With the widespread distribution of vaccines, workers are beginning to return to the office. But it will likely take time before many companies bring 100% of their employees back, and that could make for a less linear office recovery.
**Information provided by CoStar