Metro Denver’s commercial real estate market is showing signs of a return to normal following a rocky few quarters caused by the COVID-19 pandemic. There’s no question that there are still challenges to overcome as the marketplace tries to right itself after an unprecedented shock, but a few glimmers of hope for the office market popped up in the third quarter of 2021.

Perhaps the most encouraging statistic from the most recent quarter is the positive net absorption of office space, the first time this figure has ventured into positive territory since 2019. In the third quarter of 2021, the office market experience positive net absorption of nearly 240,000 square feet, including both direct and subleasing.

This figure marks a shift back to more normal leasing activity in the office market, coupled with fewer companies leaving their office space. Companies leased more than 2.3 million square feet of office space in metro Denver in the third quarter, an increase of 43% over the third quarter of 2020, when leasing activity was largely stifled by COVID-19.

Economic activity has crept back in metro Denver with the proliferation of COVID-19 vaccines, and offices are slowly reopening. This bodes well for the office market, where confidence was shaken when huge swaths of office workers were sent home to work for more than a year.

But there’s a long road back to where we left off in 2019. Before the pandemic, the metro Denver office market was cooking, with average rents approaching $30 per square foot, new product under construction and vacancy rates holding steady at sub-10%, even with new buildings coming online.

Now, the total vacancy rate is 14.3%, up 4.4% from its pre-pandemic position. The amount of space under construction has halved, although a big reason for that is the delivery of major office buildings like Block 162 earlier this year, which added more than 600,000 square feet of office space to the downtown market. Historically, buildings like that don’t come around in Denver very often, so it’s not out of the ordinary for many years to lapse between the construction of a major new downtown office building.

Direct gross office rents have held steady on average, ticking up by almost $1 to $29.60 per square foot year-over-year. Rents for sublease space, on the other hand, reflect the rush of sublease space that hit the market during the pandemic, dropping more than $2 to $24.08 per square foot on a gross basis.

Many companies placed their space on the sublease market throughout 2020, with the total vacant sublet space more than doubling over the course of the year to 2.4 million square feet. Today, there are more than 3 million square feet of vacant office space available for sublease.

What all this means for office tenants is that now is the time to act. Right now, owners are more open to negotiating various concessions like tenant improvement dollars, shorter term leases or discounted rental rates. Using a trusted brokerage like Tributary can help you secure these concessions and more when making your next real estate decision.

The last eighteen months have taught us a lot, but there are two lessons which have really resonated with us at Tributary: health is vital and so are the people you surround yourself with.

Not only does a healthy work environment lead to fewer sick days, but it will likely increase the success of your company overall. In fact, a study published by the Behavioral Science and Policy Association showed that employees were 50 percent more likely to experience health problems in an uneasy or stressful work environment. On the other end, a study conducted by NCBI showed that when employees have a sense of social support, appreciation, and a positive work environment, they perform better.

So, how can you build and maintain a strong and healthy company culture? Here are a few ways Team Tributary has found success in building an environment where people can thrive:

Implement a rhythm of play: Appreciating your teammates as people – and not just office mates – completely changes the workplace dynamic: projects flow seamlessly, collaboration is a natural effect and creativity runs high. Encourage your company to implement regularly scheduled activities, from happy hours and annual workplace parties to offsite team-building activities and retreats. Earlier this year, we went on a company retreat to Steamboat Lake. Disconnecting from our phones for a minute and connecting outside of the office refreshed and strengthened our outlook as a team.

Live out your core values: Core company values are the foundation upon which your business grows and succeeds. They also provide a valuable connection point for everyone on the team. Once your team owns those values and feels empowered by them, a strong company culture naturally follows. At Tributary, we believe in showing up, advocating always, doing the right thing, putting team above self, and giving back. These are what guide not only how we interact with our clients, but also with each other.

Staying connected (even virtually): While we believe nothing can quite replace in-person working relationships, many of our clients are choosing to implement work-from-home and hybrid working models during this most recent wave of the pandemic. In this setting, it’s more important than ever to find ways to feel connected online. Establishing that cameras need to be on during meetings is a simple way to make virtual meetings more personal, encouraging everyone to be present and engaged without distractions. Virtual team bonding activities can feel more physical by assigning breakout rooms where you have opportunity to chat privately with co-workers. Outside of meetings, regularly checking in with your team via text and phone calls will go a long way in helping them feel supported and appreciated.

According to TeamStage, 94% of entrepreneurs and 88% of job seekers say that healthy work culture is vital for success. Building and maintaining a strong and healthy work environment is critical, not only for the health and wellness of your team, but for employee loyalty and retention. When you build a thriving environment on meaningful core values, you also build boundless potential for success.

Before COVID-19 turned typical office life on its head, coworking was already amid an enormous boom that saw millions of square feet of office space leased to coworking providers in the hearts of the biggest cities in the world, Denver included. This boom ran into a roadblock in the form of stay-at-home orders and social distancing, neither of which lent themselves to working everyday side-by-side with near-strangers.

But as we work to emerge from COVID, what was once a niche movement within office real estate is poised to evolve into a model perfectly positioned to accommodate the way some companies want to do business.

As companies shift to hybrid and remote work routines, they’re increasingly incorporating coworking environments into their real estate plans for employees working in different cities or countries. In Denver, coworking spaces are popular among the many tech companies that have chosen to expand or relocate here in recent years, providing a flexible space for them to use as a home base while they finalize their local headcounts and determine their office space needs.

After experiencing COVID-related hiccups in 2020, Denver-area coworking spaces are benefiting from groups of people who haven’t yet made it back to the office – or whose companies have decided to be fully remote – but who are tired of working from home, searching for a change of scenery or looking for connection with the world outside their houses or apartments.

Circumstances have proven that many people can successfully work remotely, and they’re likely to demand this continued flexibility going forward, meaning that splitting time between home and office will become more common, according to CNBC.

But especially after the last year and a half, people want a place to connect and find community. Coworking spaces, usually specifically designed to facilitate spontaneous interactions and community gatherings, are the perfect place to find that.

A study done by the Harvard Business Review found that people who use coworking spaces reported that they find their work more meaningful, have more interactions with people outside of their industry and have more control over their work environment than people in traditional offices.

Coworking operators come in all shapes and sizes, ranging from the mom-and-pop local operators to massive international companies such as International Workplace Group (Regus) and WeWork.

Culture and target tenants other interesting differentiators between the various operators. Tech-focused coworking operators such as Galvanize offer a variety of events focused on mentoring technology startup founders as well as partnerships with software and financing providers to spur growth.

One of the most unique new coworking facilities is Tradecraft Industries in north Denver. It focuses on attracting contractors, tradespeople, and others that specialize in the built environment with shipping container-style offices in a renovated industrial warehouse.

While coworking space provides a much more flexible option for companies facing growth, tenants certainly pay their fair share to be nimble. Coworking cost is quoted in a “per desk” format which is usually two to three times more expensive than the “per square foot” rates of traditional office space. Accordingly, prices can become prohibitive as companies scale to more than 12 employees, so it’s important to keep in mind deal structure and the size of your staff if you’re considering coworking.

Use of co-working spaces has increased exponentially in the last decade, and with the ongoing movement toward hybrid work, coworking spaces offer a new flexibility to businesses as they seek to determine what normal looks like now. As business owners seek to transition to the next phase of office life, there are many factors to consider to decide the best course of action.

If you’re considering adding a coworking option to your real estate strategy, or just need guidance on your back to the office plan, our experienced brokers at Tributary are here to help.

People are headed back to their offices across metro Denver as the effects of the COVID-19 pandemic wane, with many companies re-engineering their strategies around office usage to accommodate changes in employee preferences and business realities.

These changes often necessitate tenant improvements to a new or existing office space, which is an exciting opportunity for business leaders to infuse culture and flow, but in today’s environment can be extra challenging, requiring additional consideration and expert navigation.

Even before COVID-19 sent global commodities markets into a tailspin, construction materials costs were on the rise, thanks to surging demand during a decade-long construction boom in most major U.S. cities, including Denver. The strain on supply chains caused by COVID-19 only exacerbated this problem. Coupled with uneven demand for construction materials that has left some producers unsure about how to manage production levels, many common materials are difficult to come by, or just plain expensive.

Lumber prices, for example, spiked in early May to more than $1,600 per 1,000 board feet before coming back down to $1,285 in the beginning of June, a number still well above the pre-pandemic price of $540. Similarly, paint, millwork and copper wire have shot up in price. Steel costs 60% more than it did a year ago.

Labor shortages remain persistent in construction, particularly for skilled tradespeople, which can often slow timelines and drive up prices as contractors try to lure employees away from competitors. Increased demand for subcontractors has also resulted in short bid hold periods, which further complicates financial forecasting.

On top of all of that, permitting has become increasingly more difficult than it was before the pandemic. Fifteen months of remote work for municipal workers using systems made for in-person permitting created a backlog, and many of these workers are still remote. A pandemic-related surge in homeowners applying for permits to complete small renovations to their properties added to the workload of these systems.

As a result, permitting is taking longer than expected, especially in popular, growing cities like Denver, with some reports of wait times locally stretching as long as 18 weeks. This, in turn, impacts construction schedules and budgets.

So, what does all of this mean for companies seeking to complete a tenant improvement project?

Be aware and do your research. While it may be trickier to complete this kind of project than it was 18 months ago, it’s certainly not impossible. With the right assistance and advice, tenants of all stripes can complete a tenant improvement project that makes room for the recalibration of office usage in the post-COVID world.

Tenants should work with experienced, well-connected brokers to negotiate with landlords for higher improvement allowances that will help offset the increased costs of labor and materials and ensure that the process is started far enough in advance. Market dynamics shifted during the pandemic, giving tenants more leverage to make requests like these.

It’s also critical for tenants to make sure they are casting a wide net when working with general contractors, architects and other project partners who are part of the tenant improvement process. By making sure there’s plenty of competition for their business, tenants can find better prices or generally be more selective so they’re getting what they want for their money.

At the same time, business leaders should be prepared to make timely decisions. Prices are expected to continue rising for the foreseeable future, so delaying a construction decision can mean spending thousands more than expected.

With help from an experienced team like ours at Tributary, any company can successfully execute a tenant improvement project to get teams back to work in the most efficient and thoughtful way possible, even in the current challenging climate.

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.

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