DENVER, Oct. 15, 2013 /PRNewswire/ -- Newmark Grubb Knight Frank (NGKF) released its third quarter research figures on the Denver office market, which reveal that the sector continues to enjoy a healthy recovery. According to the report, year-to-date absorption totaled more than 1.0 million square feet - topping full-year absorption for 2012 and sending a clear signal that Denver's office market is firmly in expansion mode. Additionally, the trend of declining vacancy stretched into its 15(th) quarter, with overall vacancy falling slightly to 16.3%, down year-over-year from 17.7%.
"Denver's office market has exceeded our high expectations for a breakout year, with compelling activity throughout the third quarter," said Kevin McCabe, executive vice president and regional managing director. "By year-end, Class A rates in the CBD may very well reach the previous all-time high of $32.00/sf seen in 2008. This would echo the new high of $24.55/sf for Class A rates the Southeast Suburban (SES) submarket recorded in the second quarter of 2013.
Mr. McCabe continued, "The local investment market is also on track to beat 2012's totals, both in activity and volume, and more development projects are in the works."
"Denver is one of just a handful of office markets, along with Boston, Dallas, Houston and San Francisco, where rental rates have approached or surpassed their pre-recession peaks," explained Robert Bach, director of research - Americas for NGKF. "The two hottest economic sectors and drivers of office demand are well represented in Denver: technology and energy. The strong downtown, the expanding light rail system and, of course, the area's natural beauty are combining to attract younger, educated workers to the region."
Absorption slowed a bit during the third quarter, and this was most notable in the CBD and SES submarkets. The beginning of a phased return of GSA tenants to the Byron G. Rogers Federal Building tempered absorption in the CBD, while in the SES, the bankruptcy of a financial services firm and subsequent giveback of 75,000 square feet contributed to moderate quarterly absorption of just under 100,000 square feet. Still, year-to-date absorption in both of these submarkets remained positive and, in the CBD, Class A rates increased moderately to $30.85/sf from $30.75/sf in the previous quarter.
"Steady, sustainable growth bodes well for continued expansion in Denver as companies lease more space in preparation for increased staffing," said Executive Managing Director Jamie Gard, who is currently leasing 16M, a mixed-use project with 130,000 square feet of Class AA office space near Union Station in the hot LoDo micromarket.
Morgan Stanley Smith Barney Financing and others have pre-leased approximately 50,000 square feet at 16M, which is scheduled to deliver in 2014. This is one of many examples that illustrate the shift from traditional CBD office space to the trendy LoDo neighborhood - one filled with Class AA mid- and high-rises and historic red brick buildings - which has accompanied the overall market recovery. Additional insight and history is documented in Denver's CBD and LoDo: Past, Present and Future, an NGKF white paper.
"Companies are waiting for space to be built in LoDo because there is nowhere to locate. With approximately 200,000 square feet of Class A space available, and virtually no Class C product to speak of, tenant demand is driving new development," said Executive Managing Director Jeff Castleton. "An indication of this dynamic is the newly announced 1401 Lawrence, 21-story office tower. However, classic LoDo 'brick and timber' office space - mostly Class B space - will always be limited, pushing up rents and keeping vacancy low for this class of properties, as well."
Denver's investment sector is out-performing recent years with 1.9 million square feet valued at $452.6 million trading hands in the third quarter. Year-to-date, 7.1 million square feet has been sold, valued at just under $1.4 billion. NGKF Research forecasts that the investment market is poised to well exceed 2012's total sales volume of 10 million square feet with a cumulative value of $1.6 billion.
"Denver has matured into a top 10 market in the country, with national and international investors committing to the region," said Riki Hashimoto, executive managing director, NGKF Capital Markets. "Everyone wants to participate - from core and core-plus institutional groups, value-add and entrepreneurial equity to local operating partners with both institutional and private equity sources. We are seen as a stable inland market with good macro-economics, and a nice alternative to the highly competitive gateway cities."