Denver office leasing on the rise but in hot spots; same with industrial space

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The amount of office space being leased in Denver is gradually increasing, but the activity remains concentrated in hot spots like Lower Downtown and new buildings or ones that come with plenty of amenities.

On the industrial side, after having a high vacancy rate nationally, new construction has slowed down, giving the sector time for demand to catch up with supply, according to JLL, a global commercial real estate company with an office in Denver.

Growth in both office and industrial real estate is being driven in part by growth in such industries as aerospace, high tech and manufacturing, according to JLL.

Since 2020, 52.8% of the tenants leasing office space in metro Denver have expanded their overall footprint, according to a new report by JLL.

“More space is being leased than space vacated or subleased. Gradually, every quarter, it’s getting better and better from a return-to-the-office standpoint,” said Tim Bourdelais, a JLL managing director who specializes in representing office-building tenants.

The company said Denver-area office space leased increased to 1.47 million square feet in the second quarter of this year from 1.25 million in the first quarter.

Across the country, cities have struggled to reboot their core downtown areas after office buildings emptied out during the height of the coronavirus pandemic. The same is true in Denver, where the overall office-space vacancy is 21.7%. The rates vary, with a 28.1% rate in the central business district and 13.1% in LoDo, home to more restaurants, bars and sports venues.

Another national trend that’s occurring in the Denver area is increased leasing of office space in the suburbs thanks to people who don’t want to resume longer commutes to work.

“Downtown, there definitely is a concentration of more activity, more demand from Lawrence Street toward LoDo and into the Platte Valley,” Bourdelais said. “There are pockets, like Block 162, which is a new development that has seen quite a bit of demand. It’s leased up fairly well over the last year and a half.”

The 30-story Block 162 at 675 15th St., developed by the Patrinely Group in Houston is a prime example of what Bourdelais believes it will take to get more people working more hours at the office rather than at home. The building is considered a Class A building or high-quality piece of real estate, the kind of spots that tenants are signing up for.

“What we’re seeing is that most firms are rightsizing their space and looking to upgrade their space substantially,” Bourdelais said.

The total number of employees working downtown on an average weekday in June was about 60% of 2019 levels, a report by the Downtown Denver Partnership said. Bourdelais said workers returning to the office want parking, nearby amenities they can walk to and gyms and locker rooms in the office building, he added.

“They’re almost trying to recreate what they have at home within an office space,” Bourdelais said.

And that’s a problem for the owners of older buildings that don’t have the latest bells and whistles to entice tenants. The majority of Denver’s office buildings were built in the 1970s and ’80s.

“With the older buildings, I don’t see demand coming back any time soon,” Bourdelais said. “They’re definitely going to fill up the new construction and the Class A buildings before  they start spilling back into the vintage ’80s buildings.”

On the upside, it’s “a fantastic time to be a tenant,” Bourdelais said.

“There are definite headwinds you have to navigate,” he added, “but you have a ton of options to choose from and you have historic concessions that landlords are offering in order to either get tenants to renew or relocate.”

Concessions include several months of free rent. “Pre-pandemic, we were seeing on a five-year lease maybe three or four months of free rent. Now, we’re seeing seven, eight, nine, even up to 10 months of free rent,” Bourdelais said.

Demand catching up with supply

While the vacancy rate for Denver-area industrial buildings is in the single digits, the figure has exceeded that of most of the rest of the country, said Jason Addlesperger, a senior managing director at JLL who specializes in industrial real estate. The overall vacancy rate is 7.6%.

“It really wasn’t a matter of existing space being vacated but just an incredible amount of square footage that was constructed the last two years. I think we constructed 7 (million) or 8 million square feet per year,” Addlesperger said.

Over the last five years, an average of 6.5 million square feet of industrial building space was added, he added. “Construction was just outpacing demand and growth and relocations to Colorado.”

Construction slowed as interest rates and construction costs rose. Delays in approval of permits and supply-chain holdups of such items as electric panels, air-conditioning units and dock doors delayed tenants from moving in.

“Spaces may have been leased, but not occupied and they haven’t been counted,” Addlesperger said. “We have a significant number of people actually now occupying their space.”

A couple of recent big leases put a dent in the vacancy rate as well. One of those is a lease by Symbia Logistics for 330,526 square feet near Denver International Airport.

“There are deals pending in the market, all significant names,” Addlesperger said. “You’re going to hear about some big, conventional names getting back active in the market again. I think everybody took a little breather, watching where interest rates were going to go.”

Many of the transactions Addlesperger handles are with aerospace and high tech companies that might be involved in advanced manufacturing.

“In my opinion, a lot of demand is coming clearly from government stimulus and infrastructure spending. It’s going into defense contractors and space, not just bridges and roads,” Addlesperger  said.

Department of Energy grants seem to be spurring growth among certain companies, he added. “I am working on three deals right now that are all funded in some form by DOE.”

As the commercial real estate market continues to rebound, Addlesperger and Bourdelais see challenges ahead. A big one, they said, is the threat of loan defaults and foreclosures as office space remains vacant and leases aren’t renewed.

Another is increasing property tax rates, said Addlesperger, who primarily works with landlords.

“When you have a building that’s not 80, 90 or 100% occupied and the landlord is paying those property taxes and at the same time is dealing with lenders, that’s going to be an issue,” Addlesperger said.

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