Vaccinations became widely available earlier this year, and with restrictions lifting across the city, workers began returning to the office. Leasing activity accelerated in the last six months as tenants took advantage of deals available in the market. But there’s still uncertainty surrounding the pandemic’s long-term impact on office space with many employers testing hybrid work models
and right sizing their office footprint. In addition, headwinds from the Delta variant has dampened momentum with many employers continuing to push
back returning to office.
Occupiers are starting to take advantage of the tenant favorable environment, particularly when it comes to the abundance of sublease listings that are typically offered at a steep discount. The uptick in sublet leases is helping
to offset total available sublease space on the market, which began to decrease in 21Q2 for the first time since the onset of the pandemic. There is currently 4.2 million SF of available sublease space, down from the record high of 4.7 million SF that was recorded in the first quarter.
Since the beginning of 2020, over 6 million SF has been vacated across the Denver metro. Vacancy registers 14.4%, which is now above Great Recession levels. Looking ahead, the office market is projected to remain tenant-favorable, with vacancies continuing to rise through the second half of the year before beginning to compress in 2022 through the end of the forecast.
New construction deliveries have increased the amount of available space in the market over the past year. Thankfully Denver’s office construction pipeline is thinning with only 1.3 million SF currently underway, a decrease of more than 50% from the previous year. Denver’s office market is in a period of heightened volatility, but there are reasons to be optimistic about its long-term health. Denver has enjoyed some big wins this year with the relocation and expansion of companies, and the market continues to diversify with the emergence of the tech sector’s footprint in the local economy.
The industrial sector has arguably emerged as the most resilient asset class in commercial real estate since the onset of the pandemic. Key trends have accelerated as brick and mortar retail takes a hit, such as e-commerce taking more market share, and consumers growing more accustomed to ordering online.
Tenants occupied 300,000 SF in the first half of 2021. Although Denver’s industrial market has enjoyed elevated demand, a robust construction pipeline continues to put upward pressure on vacancies with over 3.5 million SF delivering year-to-date. Since the beginning of 2021, the vacancy rate has risen by a full percentage point to 6.2%, its highest point in nearly a decade. Another 7.6 million is currently under construction.
After years of healthy rent hikes, rent growth in Denver’s industrial market decelerated in the last year. While the market has had to contend with an ongoing pandemic, the decline was instead likely due to the onslaught of
new speculative supply. Rent growth has since ticked up with an increase of 3.9% year-over-year as of 21Q3, marking a reversal after 11 consecutive quarters of decelerating rent growth. Denver rents achieved an alltime
high of $10.50/SF in 21Q3, which is still at a considerable discount relative to competing markets to the west.
Despite an uncertain economic outlook nationally, investors and lenders remained bullish on the long term outlook of Denver’s industrial market. Total sales approached $1.9 billion in 2020, just slightly behind the $2.1 billion recorded in 2019. Momentum has carried over into 2021.
The Denver retail market is arguably the hardest-hit asset class following the coronavirus outbreak but is starting to recover from the deepest trenches of the recession. Denver retailers were given the green light to operate at full capacity earlier this summer, and key indicators such as leasing activity, absorption, and asking rents responded with noteworthy improvement. While this bodes well for the local market, many retailers are still struggling to shake off the effects of the pandemic, and the road to recovery isn’t straight forward given that ecommerce continues to cut into market share. The Delta variant is posing an additional risk of upending momentum. Dozens of national retailers have filed for bankruptcy, and stable retailers have even announced store closures.
Denver’s retail market recorded six consecutive quarters of negative net absorption (19Q1-21Q1), the longest stretch on record. Smaller businesses, including restaurants and bars, drove most of the negative absorption. This trend was reversed in 21Q2 with quarterly absorption turning positive and 21Q3 is shaping up to be another quarter of positive absorption. Vacancy has risen steadily in the past two years as retailers struggle to compete with e-commerce and new supply has outpaced demand. The pandemic has
accelerated this trend with an even greater share of the population relying on online shopping. Vacancy peaked at 5.2% in 21Q3 but the positive recent absorption gains caused vacancy to contract to 4.9%. Rent gains were slowing before the pandemic, but many local and national tenants are still struggling to meet their obligations. Lease concessions have become popular as landlords attempt to hold the line on asking rents.