With the first quarter of 2021 behind us, we now have a clearer view into the impact of the depths of the COVID-19 pandemic on our local commercial real estate market. As expected, the office market has been dealt a couple of setbacks, but if you’ve been considering a new office space, now could be a great time to make your move, with an experienced, knowledgeable brokerage team by your side.
Total vacancies – including both direct-lease and sublease space – hit 13.4% in the first quarter of 2021, an increase of 3.3% from the same period last year. The vast majority of vacancies are direct, which makes up 69% of the total 23.9 million square feet of vacant office space on the market in metro Denver.
But the more compelling story is playing out in the sublease market, where the amount of vacant space has more than doubled in the past year to 2.8 million square feet, up from 1.1 million square feet in the first quarter of 2020. This is the result of companies across the metro area either slowing or stopping expansion plans or, in a few cases, deciding to bring their offices fully remote, giving up their office space before the end of their lease term.
While this is hard news to hear, this market dynamic has opened some opportunities for companies looking to move, even to a higher-quality space. Overall, full-service rents have ticked up by about 90 cents to $29.31 per square foot, according to CoStar. But breaking down rental rates by type of lease and by quality of building shows a more nuanced picture.
Direct-leased space may have risen slightly in price, but sublease prices are down, as can be expected when there’s a sudden increase in vacancy. Across all classes of buildings, full-service sublease rental rates are down about 4% year-over-year in the first quarter. Closer examination shows that Class AA buildings have experienced the biggest drop in the price of sublease space in this period, falling by 4.1%, compared to 2.7% for Class A space.
This presents an opportunity for tenants to potentially get a great deal on high-quality space that they may not have otherwise been in their price range. Additionally, this market dynamic can result in a “flight to quality,” in which case investors and tenants alike seek out high-quality spaces in greater numbers, which can result in a dip in rents for lower-quality space down the road.
But now, the good economic news. With vaccines becoming more common and more people headed back to the office, the metro Denver economy is creeping back. And in many cases, companies plan to send their staffs back to the office in some capacity, even if that means implementing a hybrid model in which some people work remotely. Projections from a variety of sources show our commercial real estate market bouncing back later this year or early in 2022.
Soon, we’ll be back on the trajectory we enjoyed from 2010 to 2019 and can leave 2020 even further in the past, growing our local economy and welcoming new and growing businesses to Denver. And no matter where the market takes us in the rest of 2021, our trusted team of brokers is here to support you.