WESTERN SNAPSHOT, OCTOBER 2005

Denver Office Market

Bitzer

The 800-pound gorilla in Denver's office market is the southeast suburban sector. Constituting more than 28 million square feet or 33 percent of the total market, this is Denver's Achilles Heel with an average vacancy rate of 22.35 percent. The opportunities are always plentiful for tenants seeking early renewals or choosing to take advantage of the over-supply by moving up to the next highest asset class, a “flight to quality” to fulfill their “space dreams” and in most instances reduce their aggregate rental. As a result, all of the positive net absorption in this sector took place in the Class A segment, netting a total of 530,000 square feet and decreasing the vacancy from 21.75 percent to 18.75 percent. The median rental rate for all space in this sector is approximately $15.75 per square foot, full service, with the low at $14 per square foot and a high at $22.50 per square foot. The good news continues as there was very little new construction to speak of.

Denver's central business district (CBD), the second largest submarket, accounts for 23 million square feet or 27 percent of the total market. Class A space was also the predominant player with just over 400,000 square feet of net absorption for the first half of the year — not bad when you consider the entire sector absorbed a net 325,000 square feet. This discrepancy reflects the trend toward moving up as seen in the southeast suburban sector. An overall vacancy of approximately 16 percent makes this area one of the healthiest in metro Denver. The median rental rate for all classes is $17.65 per square foot, full service, with the low at $12.50 per square foot and a high of $30 per square foot. There was no new supply of any significance for the first half of the year.

While the southeast suburban and CBD submarkets make up approximately 60 percent of the metro office market, there is one other sector worth noting — the northwest. While only 10.5 million square feet in size, this area is an up-and-coming player in the very popular Boulder turnpike corridor, which not long ago was dubbed as the “telecom corridor.” When the bottom fell out in 2001, the vacancy reached a record high of 53 percent. Today it sits at a much more respectable 27.3 percent with a moderate but healthy 287,000 square feet absorbed in first half 2005. The median rental rate for all classes, which is mostly A and B, is $17.50 per square foot, full service, with a range from $12 per square foot to $22.50 per square foot. There was no new construction of any significance in this sector and none planned for the foreseeable future.

The aforementioned three submarkets experienced negative net absorption of 330,000 square feet, with the southeast suburban area registering the bulk of it at 350,000 square feet. This is the result of the downsizing of two of the JD Edwards buildings in the infamous Denver Technological Center. These two buildings will be marketed to the public as multi-tenant office space during second half 2005.

This year has been quite active in the office investment sales arena when compared to other asset classes. To date there has been $660 million in sales for a total of 4.5 million square feet. There were 25 sales transactions of $5 million and above compared to 31 in all of 2004. Even more impressive is that the majority of the sales were at $10 million or more. With a plethora of money chasing very few viable investment opportunities, vacancy seems to be a non-issue as some of the properties were, at best, 50 percent occupied. Cap rates ranged from 7 to 9 percent with the 50-story, 1.2 million-square-foot Wells Fargo Tower in the CBD selling at $285 per square foot to Los Angeles-based McGuire Partners and the 160,000-square-foot Janus World Headquarters building in popular Cherry Creek selling for $352 per square foot.

For Denver to get back on its feet, job creation is imperative. Churning office space is not a fix. While Denver has been successful in the entrepreneurial arena for new start-ups, the long-term future has been short lived. Mid- and large-cap companies from out of state have been on a feeding frenzy eating up the local small caps (e.g., JD Edwards) and consolidating elsewhere. On a brighter side, job growth has increased 2.1 percent through June of this year. Gross industry receipts in all no-farm sectors for the Denver MSA were up 7.8 percent for 2004 and are expected to increase by another 8.3 percent by year-end 2005. The Mile High City's recovery is gaining momentum with the most employment upside in professional, technical and financial services as well as oil/gas and trade.

John Bitzer is the managing partner of Bitzer Real Estate Partners/ CORFAC International in Denver.

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