Denver office space struggled and industrial space surged in the first quarter

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The pandemic is not over, but at this point, there is a full year’s worth of data charting how Denver’s commercial real estate market has fared amid the health crisis.

Just what that data says depends on one’s perspective. Owners of downtown office buildings might want to turn away. But industrial real estate developers have to be pleased.

Coming off a decade-long string of success, the Denver office market has now seen a full year of more space being emptied out than absorbed, according to the latest market report from real estate services firm CBRE. At the end of the first quarter of 2021, the marketwide vacancy rate was 16.8%, the highest it had been since 2010. Downtown, the rate is 19.7%.

Hilary Barnett, a CBRE vice president focused on downtown office space, said the negative numbers look worse than they would with just COVID-19 working against landlords because the leasing cycle downtown was already set for major turnover with up to 5 million square feet of space set to roll over by 2023.

Barnett sees signs of life in a section of the city where CBRE is tracking more than 1.8 million square feet of space available for sublease and an estimated 1.4 million square feet of new space under construction.

“We are seeing a significant uptick in the market,” Barnett said, adding that everything from big blocks of space to space set up for smaller tenants is drawing interest as companies prepare to return to in-person work, at least in part. “I think there is a better understanding of what that hybrid work environment is going to look like.”

The vacancy rate is poised to rise in 2021. While big downtown office projects like Block 162 and McGregor Square have announced office tenants in recent months, CBRE’s research indicates that spec-built office projects downtown were only 32.9% pre-leased as of the end of the first quarter. That’s better than the metro-wide rate of just 22% pre-leased but still leaves two-thirds of the space up for grabs.

On the other side of the spectrum, a (new) record 8.3 million square feet of industrial space is under construction in the market now. Of that, 5.2 million square feet, roughly 63%, is being built to the specifications of incoming occupants, according to CBRE.

“Historically we haven’t seen built-to-suit activity nearly that robust,” CBRE senior vice president Todd Witty, an industrial real estate specialist, said Monday. “Larger tenants, your Fortune 500 (companies), have for a long time been talking about building out their supply chains. Now what we’re seeing is more and more of those companies are having to plant a flag in Denver.”

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Denver’s retail real estate is still struggling. Vacancy rose slightly to 7.4%, but with 192,000 square feet of space emptied out, negative absorption in the first quarter of 2021 declined 18% when compared to the fourth quarter of 2020. It’s could be a sign the damage done by the pandemic is slowing or even turning around.

Meanwhile, direct asking lease rates actually went up in the first quarter of the year, hitting $20.80 per square foot on average across the metro area, according to CBRE research.

Senior Vice President Jon Weisiger notes that retail remains, as ever, all about location. Properties located in prime spots can still drive up lease rate average even amid a pandemic. New construction can too.

“We’re seeing the suburbs really catch fire,” Weisiger said. “Everything that is sort of out of downtown has continued to really improve.”

It will take the return of office workers and business travelers to bring retail sales downtown back to pre-pandemic levels, Weisiger said.

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