NKF Predicts Downtown Class A Large Block Shortage
Denver, CO (September 14, 2018) — Global real estate advisor Newmark Knight Frank (NKF) predicts overall absorption in Denver’s Downtown submarket will top 1 million square feet per year, through 2021, leading to a shortage of large blocks of Class A space in Denver’s core downtown.
“This news is notable for two reasons,” stated NKF Executive Managing Director Sam DePizzol, a trusted real estate advisor to many of the industry-leading corporations headquartered in Denver. “First, Denver’s Downtown office inventory has increased by 13% in the last four years, all of which has been absorbed despite commanding record-high rental rates. This growth has pushed organic demand into mature Class A buildings located in the Skyline and Uptown micromarkets. The last time Downtown Denver saw a 4-year run of robust absorption, totaling approximately 1 million square feet per year, was in the early 1980s – when the Denver skyline essentially delivered.”
The average annual absorption in Downtown Denver from 1980–2017 was 322,055 square feet, according to NKF Research data, much less than the forecast totals for 2018-2021. In fact, the last time full-year absorption in Downtown Denver totaled 1 million square feet was 2006, which was a year of rapid expansion following recovery from the 2001 downturn in which absorption outpaced supply by a factor of 2:1. Given that the vast majority of new construction is Class A product and Class A buildings account for almost 70% of the Downtown office inventory, the lion’s share of future absorption will be in the Class A sector.
“Secondly, the potential lack of large blocks of space means companies looking at, relocating to, or expanding in, Denver will have to act quickly and decisively to meet expansion needs or wait until relief comes with additional new construction,” DePizzol continued. “Much of Denver’s recent success centers on its appeal to corporate users, and absorption in Downtown Denver has been driven by multiple new tenants in diverse industries, as well as organic expansion.”
NKF Research notes that there were 9 contiguous blocks of space 75,000 square feet or larger available in Downtown Denver in January of 2018. “That number will soon be down to 5, taking into consideration current deals in the works,” explained NKF Executive Managing Director Tom Lee, an office specialist focused on headquarter relocations, ground-up development and build-to-suit projects. “Scalability is a big issue and costs a premium in today’s market. For example, WeWork is seeking to capture full-floor+ tenants or tenants requiring future scalability in its facilities at Tabor Center and Wells Fargo Center, at a premium rate. Lack of options forces potential tenants to look in expanding market areas. As options become limited in core downtown areas, available large blocks of space in Uptown and Skyline, once a concern to owners and developers, are rapidly being leased up.”
New deliveries, typically drivers of absorption, will total approximately 2 million square feet by year-end 2018, but supply is expected to outpace absorption for the year. It’s important to note, as per NKF methodology, much of the new product is already leased up but is not counted as absorption until tenants physically occupy their spaces.
“Lagging tenant move-ins into new product and a select number of large deals that won’t occupy until 2019 are contributing factors to our strong absorption prediction for 2019,” added NKF Research Director of Research, Lauren Douglas. “New construction will slow in 2019 and 2020, with under 400,000 square feet delivered each year, but will increase significantly in 2021, with an expected 1.2 million square feet of new product.”
“We are not by any means ‘over our skis’ on new product,” added DePizzol. “Continued strong demand and a lull in the development pipeline in 2019 and 2020 will encourage overall downtown vacancy to plunge 450 basis points by 2020, a decidedly landlord market. The relatively small deliveries in 2019 and 2020 will contribute further to Denver’s large block shortage overall. And, demand for new product will continue, trickling down to older product, causing rental rates to appreciate 3–5% annually over the next few years.”
NKF Research notes that downtown Class A office space currently has an average leasing asking rate of $40.22 per square foot with new construction approaching $60 per square foot, a level never before seen in Denver. “Even with expected appreciation, Denver rates are still half of Class A rates in downtown San Francisco, making Denver a viable option for many corporations,” concluded Lee. “New construction to be built in the future will deliver at an even higher basis due to escalating construction costs,” predicted DePizzol. The current downtown expansion, forecast to continue into 2021, has been steady and strategic, driven by an influx of new users, especially tech users and creative tenants – a new trend for downtown – and organic expansion, with development proceeding in a controlled and disciplined manner. “We [Denver] are entering the first year of a four year run that will be characterized by dwindling vacancy and increasing competition for blocks of desirable space,” underscored Lee. “Denver’s Downtown submarket conditions will impose both a sense of urgency and clarity on tenants looking at entering or expanding/relocating into Downtown Denver.”