The greater economy is clearly on the rebound after more than a year of holding its breath in anticipation of how long the COVID-19 pandemic would last and how severe its impacts would be. And while there are good signs ahead as we get back to business, the commercial real estate market in metro Denver began to show more signs of strain in the second quarter of 2021 – which could put tenants in a better position to secure office space at a more favorable rate.
Direct average office rents, which managed to remain mostly flat – even ticking up slightly – through 2020, dipped for the first time since the pandemic set in to $29.31 on a gross basis in the second quarter of 2021. The decrease is only about 4 cents per square foot quarter-over-quarter, but actually represents a 3% increase over the second quarter of 2020. While rents haven’t changed much during the course of COVID-19, the current market is favorable for tenants, with many able to secure better terms elsewhere in their leases, for example getting more landlord contribution to their tenant improvements or other concessions.
As you might expect, total vacancies have ticked up at the same time, to 14% on average across the metro area, compared to 10.3% a year ago. The amount of vacant sublease space has nearly doubled in a year to 3.4 million square feet, while direct vacant space rose by 32% in the same period to 24.5 million square feet.
One important contributor to the increase in vacant space is new construction. With the completion of some big office projects such as Block 162, a 595,000-square-foot office tower in downtown Denver, almost 1.4 million square feet of new office space were delivered in the second quarter, according to CoStar. That’s the most new office space to hit our market since early 2018. And even in the best economy, it takes time to lease up that much space.
It’s important to note that in the second quarter, total net negative absorption was less than 500,000 square feet, substantially less than in the previous three quarters, when the market experienced more than 1.5 million square feet of negative net absorption each quarter. There are still great opportunities for tenants seeking new office space, but the dramatic slowdown in space going on the market as vaccines spread and companies got back to the office is heartening for the overall health of the market.
Simultaneously, leasing activity picked up across the board, with 2.7 million square feet of office space leased, the most since before the pandemic.
These are encouraging data points in spite of the many challenges that we’ve all experienced in the last year and a half. And at Tributary, we know that the health of the Denver-area economy before the pandemic is a boon to everyone and provided us with a solid foundation that we can now use to launch into the next era of our local commercial real estate market.
The diversity of our economy here in metro Denver, including industries like financial services, technology and aerospace, provides insulation against economic turbulence. This diversity has only grown in the decade since the Great Recession and will serve us well as we move beyond COVID-19. The city’s status as a hotspot for people and moving from the coasts continues to grow as well, further indicating strong recovery for metro Denver through the rest of 2021 and beyond.
We know that some office users will need to rethink their strategy, and we have the resources to help with that transition. And if you’re unsure how to navigate this unprecedented market, our expert brokers are here to help.