Office market close to ‘full recovery,’ says Cassidy Turley

By Jill Jamieson-Nichols
Colorado Real Estate Journal
 
Denver led the country in job growth in the first quarter of the year, and its office market is doing very well compared to other markets around the country, according to Cassidy Turley Chief Economist Kevin Thorpe.

“Denver is a million miles away from a recession right now,” Thorpe told approximately 200 people at a recent Cassidy Turley Fuller market update in Denver.

According to Thorpe, Denver was 13th in the nation in job creation last year with 18,000 new jobs. So far this year, 15,700 jobs were added. “That’s a huge move,” said Thorpe, who added that job growth was due in part to corporate relocations like Arrow Electronics and companies including GE increasing their presence in the market.

For the nation and Denver, the European economic crisis is the biggest threat to continued recovery, and there are sectors of the economy, including financial services, government and information, that aren’t doing well. But top-tier office buildings in Denver are seeing rent growth, and there is sustained demand for office space, Thorpe said. Denver was fifth in the nation in annual absorption of office space in 2010 and 2011 combined, behind New York City, Washington, D.C., San Jose, Calif., and Seattle.

“I would argue you are very close to a full recovery in the office sector in Denver,” said Thorpe. With typical demand for 2.3 million square feet of space annually and less than 1 million sf of new construction delivering through 2013, “Office rents in Denver have nowhere to go but up.”

According to Cassidy Turley Fuller broker Doug Wulf, there has been more than 5 million sf of absorption in the office market over the past 10 quarters, 85 percent of that in the central business district, southeast suburban submarket and along the northwest corridor. The energy, finance, aerospace, telecom and health care industries have been the biggest demand drivers.

Approximately 80 percent of office space absorption year to date has been in buildings built in 2000 or later, said Wulf, who noted Denver is a “graying” office market. Nearly 75 percent of Denver’s office space is more than 25 years old, and therefore only 15 million to 18 million of the 29 million sf square feet of available space is “viable,” he said. Class A buildings with efficient floorplates, parking greater than four spaces per 1,000 sf and other modern features are starting to take off, with people willing to pay more for quality space in a building that is not functionally obsolete, he said.

Wulf projected there will be good rent growth (5 percent to 20 percent) in Denver’s top three submarkets over the next 12 to 18 months. He also expects five to 10 new spec or partially preleaed buildings will break ground over the same time period, most of those in the CBD, along with three or more build-to-suits of 120,000 sf or more.

The Cassidy Turley Fuller office in Denver saw significant transaction volume in April, President and Chief Executive Officer Greg Morris said in a recent telephone conversation. Although many of the deals had been in the works for months, office and industrial leasing momentum has been particularly strong. “I think we’re seeing the activity we saw in the first quarter continue into the second quarter,” he said, noting the office sector has benefitted from employment growth, and as the residential market improves, that helps the industrial sector.

“It feels better, but we’re not out of the woods by any stretch,” he said, citing Europe and adding there will continue to be uncertainty until the November presidential election.

The most sizable deals in April included Merrick & Co.’s 103,508-sf lease at Greenwood Corporate Center (Wulf and CTF broker Dan Miller), a 550,000-sf build-to-suit deal for United Natural Foods (CTF broker Alec Rhodes), a 66,986-sf office lease in Highlands Ranch (Wulf, Miller and CTF broker Joe Sigdestad) and a 49,584-sf office lease for First Western Financial at 1900 Sixteenth Street in Lower Downtown (Wulf represented the tenant; CBRE brokers Chris Phenicie and David Hart represented the landlord).

In the Denver industrial market, vacancy has dropped during eight of the last nine quarters, driven by manufacturing, technology, and the food and beverage industry, according to Rhodes. Rental rates are leveling off, there’s been an increase in sales activity, and, “Investment demand has never been higher” for quality product, he said at CTF’s forecast event.

Commenting that “2012 is going to go down as the year of the build-to-suit,” Rhodes said there are six deals under way for 1.64 million sf, and others being designed could put that number over 2 million sf by year-end.

According to Cassidy Turley Fuller retail broker David Fried, Denver’s retail market is recovering better than most markets across the country. But, he added, “If you’re not in a great location, it’s tough out there.”

By way of illustration, Fried said an “A” location on First Avenue in Cherry Creek can bring rents of $60 to $80 per sf triple net, while rents two blocks to the north on Third Avenue are in the $20 to $30 range per sf triple net.