The Denver office market is attempting to join the ranks of front runners nationally for strength, and tenants and investors continue to agree.
In a recent report by Dividend Capital, the Denver office market was highlighted as one of the furthest toward recovery, and the group forecasts a continued move towards new construction as rental rates maintain their climb.
While both occupancy and rental rates are currently below their peak of five years ago, absorption has stabilized at a sustainable quarter of a million square feet per quarter, making those records attainable in the not too distant future.
The majority of leasing continues to be concentrated in the services sector, although energy and technology are making a comeback, greatly aiding the central business district and northwest markets respectively, where these industries are clustered.
Market Assessment
First quarter brought positive indicators to most of the metro submarkets.
The trend of poor first-quarter performance that has plagued the Denver market for the past several years seems to have lifted, as all but two submarkets saw an overall decrease in vacant space during the quarter, leading to a drop in vacancy of 170 basis points metro-wide.
Leading the decline were several submarkets that had been slow to recover including the west, southwest and Boulder markets.
Also showing continued strong leasing activity were the central business district, southeast suburban, northeast and northwest markets, the overall absorption leaders for 2005.
Only the lower downtown and midtown markets did not see significant positive activity this quarter, mainly due to already tight markets with limited expansion opportunities.
A closer look at the market shows class B leasing finally increasing in velocity as class A space continues to tighten. Ten of 11 submarkets improved for class A space, and seven of 11 class B submarkets, a significant increase from 2005.
Class C buildings in tighter submarkets also have shown continued improvement, though class C space in the southeast suburban and northwest remain depressed due to the large quantities of class A and B space on the market.
For most submarkets the decline in vacant space led to a corresponding increase in rental rates, with six submarkets increasing by an average of 87 cents during the quarter.
Rents declined 25 to 50 cents in most markets, though vacancy rates decreased by 340 basis points.
The Boulder market, which had been recording lower rates for some time, seems to have stabilized as office space was absorbed in the quarter.
Marketwide class A spaces saw rents increase by 25 cents per square foot, class B spaces by 18 cents per square foot and class C spaces by five cents per square foot.
Despite a national slowdown in investment spending during the fourth quarter fueled by rising cap rates, institutional spending on office buildings in the Denver area has increased in each of the past four quarters.
There was about $1 billion of investments in the first quarter. Buyers are becoming slightly more discriminating regarding properties, but high demand continues to fuel spending.
CarrAmerica and Amerivest are selling off Denver holdings, with Amerivest liquidating its assets and CarrAmerica listing half of its Denver portfolio in an attempt to capitalize on leasing improvements at the properties in recent months.
First quarter saw a vacancy rate of 10.1%, the lowest vacancy rate in the first quarter in four years.
There is about 1.3 million square feet of office space currently under construction that is set for completion during the year, further fueling demand.
As these new projects become available, some landlords will continue to offer longer lease terms and higher tenant improvement allowances as incentives to keep overall vacancy down.
While high construction costs and land prices continue to sway some businesses from moving to the Las Vegas Valley, more national companies are beginning to see the promise the Cheyenne Technology Corridor has to offer.
The Portland economy continues on its recovery path with falling unemployment, a solid job growth rate and continued in-migration of a highly educated workforce.
The office market ended the year on a solid note with respectable fourth quarter net absorption and a slight drop in vacancy, reflecting historic trends for this time of year. (Note: Grubb & Ellis hasn’t produced its first-quarter report for Portland. The following statistics are for the fourth quarter.)
The vacancy in Portland’s central business district was 11.3% in the fourth quarter, down from 12% at the end of 2004. Suburban vacancy has recovered at a faster pace but had farther to go. Vacancy now stands at 13.4% for the suburban markets, down from 15.9% at the end of 2004.
It is clear the Portland office market is moving along the real estate cycle, with some submarkets ahead of others.
Central business district class A asking rates are up 3% from 2004 when the average rate was $22.03 per square foot per year. Rates now stand at $22.66 full service.
Suburban class A asking rates also are up slightly from the fourth quarter 2004, now standing at $22.36.
Construction was modest, with just 323,000 square feet of space completed in 2005. That’s the smallest amount of construction to deliver to the market since before 1996.
The office market will continue to improve in 2006 driven by solid job growth in office-related industries. Expect to see single-digit vacancies by year-end 2006.
Overview
The Portland metropolitan area economy is recovering at a respectable pace. Portland’s unemployment rate, now down 120 basis points from year-ago levels, is 5.3% and dropping rapidly.
Of all large metropolitan areas, Portland is nearly tops in terms of largest year-over-year drop in unemployment rates, ranking No. 2 behind Birmingham, Ala.
The pace of the recovery in the Portland office market moderated slightly in the fourth quarter, reflecting historic trends for this time of year. 2005 will stack up as a respectable year overall in terms of vacancy and net absorption.
The office market closed 2005 with a vacancy rate of 12.5%, down from 14.3% a year earlier. Net absorption for the year totaled 1.1 million square feet, a healthy number in the context of the past five years.
Submarkets that saw the most activity in the fourth quarter also were the top performers for the year overall. The central business district saw 61,000 square feet of net absorption this quarter and almost 225,000 square feet for the year.
The Sunset Corridor and Clark County also were strong performers in the fourth quarter and for all of 2005. Clark County accounted for 266,000 square feet of net absorption and the Sunset Corridor grew by 232,000 square feet in 2005.
Many large leases were announced in the past several months. Some represent office space musical chairs, while others represent new demand.
In the central business district, CH2M Hill signed one of the largest leases this year, consolidating and relocating from the Lloyd District. Other large deals in the area include Multnomah County’s lease of 99,000 square feet at the Lincoln Building, OHSU’s lease of 68,000 square feet and Umpqua Bank’s lease of 52,000 square feet.
Activity in the Sunset Corridor included the 54,000-square-foot expansion of Norm Thompson and the purchase of the 72,000-square-foot Dawson Creek Corporate Center by the city of Hillsboro for a public library.
These shifts resulted in two submarkets seeing negative net absorption this quarter,the Lloyd District and Washington Square/Kruse Way.
While vacancy rates in these two submarkets bumped up slightly, they remain the tightest in the metro area, along with the central business district.
