WESTERN SNAPSHOT, DECEMBER 2007

Denver Office Market

Bitzer

Denver’s office market has roared back to equilibrium over the course of the last 2 to 3 years and has fully recovered from the last market cycle of 2001. With a lack of new Class A office space and few large blocks of contiguous space available, developers are busy filling the skyline with cranes.

The majority of new development is located in lower downtown, more commonly refereed to as LoDo. LoDo is the epicenter of mixed-use development where residents can live and play within close proximity to their offices. Transit-oriented development has spread from downtown along the $6 billion future light-rail system set to begin construction in 2009. Developers are already building mixed-use projects adjacent to current and future light-rail stations. Even the northwest corridor between Denver and Boulder, once the market’s and one of the nation’s poorest performing submarkets, currently has two major office/mixed-use developments under way.

Overall leasing activity slowed during third quarter from 1.6 million square feet in the second quarter to 350,000 square feet. While absorption is still positive, the latest quarter was a far reach from the recording-setting quarters during the past year and a half. Additionally, after a record-setting first half of the year, the investment market has slowed significantly during the current credit crunch as both buyers and sellers seem content to wait until after the first of the year before reentering the marketplace.

The metro Denver office market ended the third quarter with a vacancy rate of 12.7 percent and an average asking rental rate of $20.54 per square foot. The southeast suburban area, metro Denver’s largest submarket, finished the quarter with a 14.7 percent vacancy and an average asking rental rate of $20.25 per square foot. Denver’s central business district (CBD), the metro area’s healthiest submarket, had a third quarter vacancy rate of 10.1 percent with an average asking rental rate of $26.21 per square foot, while the northwest corridor had an 11.8 percent vacancy and a $18.03 per square foot average asking rental rate.

As mentioned earlier, LoDo has several major developments underway including 1515 Wynkoop, a Hines development totaling 285,217 square feet that will be completed by fourth quarter 2008; 1400 Wewatta, an Opus development totaling 210,185 square feet that will be completed by fourth quarter 2008; and 1900 16th Street, a Trammell Crow Company development totaling 677,491 square feet that will be completed by fourth quarter 2009. Other major developments include the John Madden Company’s 305,250-square-foot Palazzo Verdi, scheduled for completion in fourth quarter of 2008 in the southeast suburban submarket, and Callahan Capital Partners’ proposed Tabor II in the CBD. Among the tenants planning to occupy space in the developments mentioned above include Van Gilder Insurance, Chipotle and Ciber Inc.

The sale of the Janus World Headquarters building in Denver’s Cherry Creek submarket to GE Real Estate for $399 per square foot started the year out with a bang, only to be outdone by Callahan Capital Partner’s $770 million acquisition of the former Equity Office Properties downtown portfolio. Wells Real Estate, LBA Realty, Legacy and Principal have also been active acquiring office product during the first three quarters of the year.

Major tenants recently on the move include Lockheed Martin, Promotech, Gambro, the Democratic National Convention, Time Warner Cable and Clifton Gunderson.

2008 should be an interesting year for Denver as the national spotlight will be firmly focused on the city with the upcoming Democratic National Convention. As Denver is busy building hotels, retail and residential, and improving the infrastructure in and surrounding the CBD, developers will take note as to how much new office development is being absorbed. With asking rental rates at or approaching an all-time high, new construction demanding rates north of $35 per square foot and the continual rise in construction costs, all eyes will remain on future employment growth, and secondary submarkets will continue to benefit from tenants looking for below market rates.

With the current credit crunch firmly in the rear view mirror by early to mid-2008, investors should continue to find Denver a relative bargain compared to major and secondary markets along the coasts. Lastly, LEED-certified or green building continues to be a lasting trend as developers look to meet the expectations of future tenants looking for sustainable development and willing to pay the additional premium in rent.

J.R. Bitzer is a principal at Bitzer Real Estate Partners/CORFAC International in Denver.

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