The Denver metro area has climbed to third in the country for net absorption of office space, behind only the gateway cities of San Francisco and Midtown Manhattan, New York.
“This city is gobbling up office space with the likes of New York and San Francisco, and you offer higher returns,” Kevin Thorpe, Cushman & Wakefield chief economist and global head of research told a crowd at the brokerage firm’s Denver Client Luncheon Oct. 29.
Net absorption in Denver was 2.2 million square feet through the third quarter. The vacancy rate for office space inched up to 15.7 percent metrowide, around the historical average, and that’s a good thing, said Thorpe. “It’s keeping rents relatively affordable,” he said, adding rent growth, which ranged from 5 to 7 percent over the last few years, has slowed to 3.7 percent.
Meanwhile, Denver is on pace to create 40,000 jobs this year, about a quarter of which are office-using jobs, according to Thorpe.
So, even though Denver is one of the top markets in the country for construction of new office space, with almost 5 million sf to be delivered through 2020, overbuilding is “probably not” an issue, he said.
“I’m actually more concerned about the older product going forward,” he said. With 60 percent of the metro area’s office product built before 1986, Thorpe said building owners who haven’t already done so need to invest in renovations to be competitive.
Coworking has experienced “remarkable growth” both in Denver and across the country but represents less than 1 percent of U.S. office inventory and less than 0.5 percent in Denver.
Thorpe also touched on the Denver multifamily, industrial and retail markets, and provided an overview of the U.S. economy
He sees no slowdown in Denver’s industrial market; he said retail is “misunderstood,” with sectors like restaurants, fitness clubs and other “experiential” retail thriving; and said, “I think we have years of very strong demand for multifamily.”
However, “Denver is becoming very expensive,” with the median home price accelerating from $244,700 10 years ago to $444,933 today – the ninth highest level in the country and higher than Washington, D.C.
“You’ve got to build more, build more houses, more multifamily. Don’t let Denver become so unaffordable that young people leave,” he cautioned, noting young workers are key to sustaining the office, retail and industrial markets.
The U.S. economy is “by nearly every relevant economic metric … in very good shape right now,” Thorpe said. Most members of the National Association for Business Economics, the top professional association for business economists, believe expansion will continue through 2019, he said. Yet, there is “anxiety” over the length of the current cycle, interest rates, tariffs and other factors.
It’s tempting to assume higher interest rates will mean lower real estate values, Thorpe said, adding history indicates the negatives of higher rates more often than not are outweighed by positives of a boost in operating revenue. Value-add assets typically benefit the most because higher interest rates signal better lease-up, while core assets are more exposed, he said.