Denver’s office market started 2020 on pace to continue the market expansion following a decade of growth in market size with approximately 10 million square feet of new office deliveries, over 13 million square feet of net absorption, plunging vacancy rates, and steadily appreciating rental rates. However, the contraction that is being wrought by oil pricing and COVID-19 related contractions, downsizing, and increasing sublease inventory is turning the tide with Denver facing what could be the first year of contraction and overall negative net absorption since 2009.
Overall, leasing activity has stalled while a multitude of tenants elect to pause decision making or engage in short term solutions and gain time for clarity in the overall economy, their business environment, and employee sentiment regarding going back to the office.
As we went enter mid-august, we are starting to witness that the Covid-19 shutdowns have had less of a negative impact on the industrial sector than in the retail or office segments. Industrial businesses can conduct operations that are considered essential. This industry was able to stay open amid widespread shutdowns. Additionally, distribution businesses have seen consumers ordering more from their homes during the quarantine. An example of this is, Amazon leased 700,000 SF in Aurora in mid-March as part of its plan to hire an additional 175,000 workers across the U.S.
Vacancies were below the long-term average even after 2019 shattered records with more than 6 million SF of deliveries. Entering 2020, around 5.5 million SF was under construction. According to research taken from CoStar, industrial rents are more than 60% above the peak of the previous quarter, one of the best performances in the nation. However, rent growth in 2019 noticeably moderated from outsized figures in past years, when the market routinely posted annual gains of more than 7%.
Investors have remained enthusiastic about Denver’s industrial market by setting a record high for sales volume for the second straight year. More than $1.7 billion worth of assets traded in 2019, more than $200 million more than the previous year. Pricing continues to climb upward, although at a more modest pace than in past years, according to CoStar’s Pricing Trends.
The negotiating leverage is slowly shifting to the benefit of our clients, the tenants, and the occupiers of office space. We’re engaging with property owners and their agents to push for deal terms that meet our clients’ needs both in terms of price and flexibility to reflect the current economic environment and the slow recovery that’s currently anticipated.
We’re pushing and receiving increased incentives in the way of abated/free rent, turnkey improvements or increased improvement allowances inclusive of moving allowances and inducements, and utilizing sublease inventory with creditworthy sublessors to bridge the gap of client needs in this COVID economy.
