The Denver office market is showing early signs of recovery, but still has a long way to go before it reaches pre-pandemic levels of performance. Tenants are again making long-term decisions, and leasing volume in the last four quarters has resembled 2019 levels while the average lease size continues to trend upward. Sublease inventory declined further this year with 4.5 million SF currently available, down from the record-high of 4.7 million SF that was recorded in 21Q1. Zynex, Charlotte’s Web, DCP Midstream, and AT&T have taken down large blocks of sublease space in the last year, just as the pace of new listings coming to market has slowed.
There are plenty of positives to keep the momentum going. 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 populate the Mile High City, which plays a vital role in drawing the metro’s high-paying employers.
While the office market has improved, the risks are clearly evident for both the short- and long-term. Many companies are settling on either a fully-remote or hybrid work model. 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. The amount of relinquished space has most likely already peaked, but continued work-from-home initiatives could slow the office market’s growth going forward.
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.
Driven by robust population growth and the rise of ecommerce in the COVID-19 era, Denver’s industrial market remains in expansion mode. The market has added 26 million SF in the last five years and is on track to add another 10 million SF in 2022. Businesses continue to choose Denver due to the city’s central location, abundant land availability, and strong infrastructure.
Denver’s industrial market is benefitting from the national logistics boom that has taken hold since the onset of the pandemic, and companies are placing growing importance on maintaining or expanding their supply chains. The market absorbed 8 million SF in 2021, the highest level achieved on record. Amazon, Fedex, Alan Ritchey, and Aspen Distribution were among industrial tenants taking on large space commitments in the metro in the last year. CoStar projects that 2022 will be another record year with over 8 million SF in the annual absorption forecast.
The current vacancy rate of 5.2% is above both the metro’s 10-year average of 4.9% and the national average of 4.0%. While vacancy has declined in recent quarters since peaking at 6.8% in 21Q2, this comes after a long run dating back to 2016 of new supply outpacing demand. Denver is easier and cheaper to build in relative to most other major metros, particularly those located along the coasts. This aspect of the market gives it the potential to easily become overbuilt. Recent record demand indicates that new projects coming out of the ground should lease well in the near term, while labor and supply issues will act as a governor on runaway supply, thereby insulating the market from large vacancy swings for the foreseeable future.
Surging rents and sustained demand in the Denver market have captured the attention of investors. Investors are willing to pay top dollar for newly delivered industrial product even without a tenant in place, allowing the buyer to capitalize on current market demand while avoiding potential construction risks brought on by supply chain issues. The addition of high-end industrial inventory is helping to drive investment prices higher and tighten cap rates.
Retailers appear to be gaining confidence in the market. A boom in consumer spending was a key driver for the recovering sector in the last year. Personal savings added up during the pandemic as people stayed home, and those savings translated into a substantial uptick in spending. Additionally, fiscal support provided by the U.S. government throughout the pandemic provided consumers with additional funds at their disposal.
The pandemic accelerated the rise of e-commerce, which has cut into traditional retail market share. But sales at brick-and-mortar locations also rose in the last year, prompting tenants to expand their footprints. Trailing 12-month absorption totals 1.0 million SF, a sharp rebound after 850,000 SF was vacated in 2020.
Asking rents are on the rise, increasing by 3.4% year-over-year. Investors have returned to the market; sales volume in 2021 was the best year on record.
While retail fundamentals have improved, the sector still faces headwinds in 2022. Foot traffic returned to Denver’s urban areas, including Downtown and Cherry Creek, with the successful roll out of the vaccine. But the omicron variant is dampening momentum with return-to-office plans delayed and many consumers staying home in the wake of the recent surge. Retailers continue to struggle with supply and labor shortages. This issue is felt across all economic sectors and will take time to resolve.