The Denver office market continues to feel the effects of the coronavirus pandemic. While 2021 ushered in widespread vaccinations and a return-to-office initiative for many businesses, headwinds from the delta variant, followed soon after by the omicron variant, has dampened momentum. Many employers have now pushed back a return 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 helped 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 4.0 million SF of available sublease space, down from the record high of 4.7 million SF that was recorded in 21Q1.
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 1.4 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.
The industrial market is humming along for landlords, developers and investors. Tenants are leasing industrial space at a record pace, and even with a booming supply pipeline, vacancies have compressed in recent quarters.
From the viewpoint of tenants, rents have never been higher and many are finding themselves with little negotiating power to reduce rates. Companies have placed a growing importance on maintaining or expanding their supply chains. But Denver’s geographically isolated location can be a challenge to distributors competing with Amazon to deliver their products at unprecedented speeds. To meet the demands of consumers throughout Colorado’s densest population cluster, distributors are ramping up operations in the Mile High City to be closer to their customers. In addition to Amazon, Alan Ritchey, Aspen Distribution, and Planterra Foods were among industrial tenants taking on large space commitments in the metro in the last year.
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 Denver retail market was arguably the hardest-hit asset class following the coronavirus outbreak but enjoyed a rebound in 2021. 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 1.1 million SF, a sharp rebound after 850,000 SF was vacated in 2020. Asking rents are on the rise, increasing by 2.9% 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.