Denver Office Leasing Leaps 38% In Q3 Over 2022's Doldrums
Leasing activity in Denver’s office market increased 38% year-over-year in Q3 to 1.3M SF, and while that figure is a sharp increase from its pandemic-induced hibernation, Cushman & Wakefield analysts cautioned in their latest market report that the market is still facing significant headwinds.
Denver’s office market, like most others in the U.S., has struggled since the pandemic began because of the popularity of remote and hybrid work options. While a majority of Denver’s nearly 23% office vacancy rate is concentrated downtown, the report suggests that economic uncertainty from high interest rates and multiple global wars could weigh on office leasing activity for the foreseeable future.
“Office leasing remains under pressure,” the report says. “Tenants continue to display hesitancy towards signing new leases, particularly for extended durations, and remain cautious about expanding their operations until market and economic conditions stabilize.”
Outside of macroeconomic pressures, Denver’s office market trying to find a balance as tenants continue to downsize or move to higher-quality offices altogether. Cushman & Wakefield found that the market recorded nearly 1.2M SF of negative net absorption in Q3. This activity was fueled by large exits by companies like Kaiser Permanente, which left its 142K SF office at 9800 South Meridian Blvd. in Englewood.
There has also been a considerable slowdown in metro Denver’s office construction pipeline, as capital remains expensive to obtain and construction material prices remain elevated. There were no new projects that broke ground during Q3, and the projects that were delivered were concentrated in the central business district and in the River North business district, both of which have the highest overall vacancy rates in Denver.
The Midtown submarket, which includes Cherry Creek, remained the best-performing submarket in Denver during Q3. Cherry Creek had 289.5K SF of office space under construction, and the submarket also boasted a 16% vacancy rate, which was the lowest in the metro area during the quarter, according to Cushman & Wakefield.
But construction activity across the Denver metro area seems likely to face increased downward pressure because of the high cost of capital and construction materials, Cushman & Wakefield’s report says.
Data from the Federal Reserve Bank of St. Louis shows that construction material prices have increased by 2.6% year-over-year and are up by more than 38% since the pandemic began.
In a speech delivered to the Economic Club of New York earlier this month, Federal Reserve Chairman Jerome Powell expressed concerns that inflation is still too high and it may warrant at least one more interest rate increase. The Federal Open Market Committee meets next week to decide whether to raise interest rates again.
Despite the challenges, there are a few bright spots in the market. Denver posted a 3% unemployment rate during Q3, and the national unemployment rate was 3.7%.
Subleasing activity saw a modest decline of 12K SF in Q3, according to Cushman & Wakefield, which described the activity as “robust.” However, the firm cautioned that these subleases are likely to convert into direct vacancy in upcoming quarters, as tenants continue to express little desire for office space.
