Commercial Real Estate Market Outlook
Quarterly and topical research insights to help your business gain competitive edge in commercial real estate.
Denver Office Market Report / First Quarter 20211 Apr 2021
Office leasing activity totaled 993,039 square feet (sf) in 1Q2021, representing a 13% decline quarter-over-quarter (Q/Q) and the slowest quarter since 2Q2020. The largest deal was Sherman & Howard’s 60,000-sf lease at the newly-completed Block 162, which represented a 54% reduction in square footage from their current location at 633 17th Street. With the demonstrated functionality of the flexible/remote work model as a result of COVID-19, the market will like see more examples of downsizing and flights to quality in the coming quarters.
The average full-service gross (FSG) asking rate in Denver contracted slightly in the first quarter of 2021 with an average rental rate of $29.63 FSG, down from $29.72 FSG at the end of 2020. Though office rent growth had begun tapering off in Denver prior to the on-set of COVID-19, rental rate contraction the last four quarters has been relatively modest, with many landlords offering greater concessions on TI and free rent in order to preserve face rates. However, with a 5% jump in vacancy YOY, rental rates are beginning to reflect the drop-off in demand.
Though office sales volume has yet to approach pre-pandemic levels, office transactions were up 47% Q/Q, ending 1Q2021 with $306.4 million. The Southeast Suburban submarket, which has been popular with investors for years due to its high-credit tenancy and comparatively lower prices, continues to be the most consistent submarket for investment activity during the pandemic, accounting for $137.5 million of the total sales volume for 1Q2021.
Spurred by uncertainty and shifting corporate priorities in regards to professional office space, net absorption trended negative for the fourth consecutive quarter, ending 1Q2021 with negative 1,772,065 sf of net absorption. Office vacancy rose 60 basis points Q/Q as a result, ending the first quarter of 2021 with a vacancy rate of 15%. With companies still downsizing or shuttering their offices entirely, the vacancy rate will likely continue to rise as 2021 progresses.
With projects like Block 162 and McGregor Square nearing completion and no new construction starts in the first quarter of 2021, the development pipeline in thinning out, with only 380,447 sf currently slated to be under construction in 1Q2022. The pandemic and the rising cost of materials remain the driving factors in determining if and when new projects will break ground.