Energy sector still impacting office market

The initiative could also lower Colorado’s gross domestic product by an average of $7.1 billion in the first five years and $14.5 billion between 2017 and 2031.
Lindsay Brown Senior vice president, JLL, Denver

Lindsay Brown
Senior vice president, JLL, Denver

From an office market perspective, last year was characterized by significant changes in the energy sector, as the industry grappled with a sustained depression of global oil prices.

These conditions led a number of energy companies to pursue cost-cutting strategies when it came to their office space – from subleasing unneeded space to pursuing new leases with smaller footprints and more flexible terms. Leasing activity from the energy sector has continued to dip in 2016.

Although there have been a number of layoffs in the last few years, the vast majority of energy tenants continue to pay rent on all of their space. Whether this trend continues remains to be seen.

The impact of bankruptcies on the market thus far has been minimal, although we believe the effects of the downturn in the energy industry have yet to be fully felt in the office market.

However, with all that said, it is important to note that the Denver commercial office space market is still thriving, and the diversity of our economy has a lot to do with that.

Our economic diversity is helping mitigate the impact of the current energy industry situation on the overall office market. In fact, with a few recent exceptions, as energy companies have vacated or subleased, other industries have been quick to absorb downtown space. Although we experienced negative absorption in the first quarter, we expect that with a number of expansions and relocations in the works, we ultimately will be in the black for 2016.

The Rise of the Tech Industry

The best example of an industry taking advantage of current market conditions is the fast-growing tech sector. Boulder has long been associated with a strong tech-friendly atmosphere, but Denver is fast on its heels. Denver ranked No. 4 nationally on JLL’s list of cities predicted to be technology hotspots in 2015, as measured by tech economic momentum, talent pool, startup friendliness, and market factors such as cost of office space and housing – a prediction that certainly came to fruition.

Denver continues to attract a highly educated workforce as demand for skilled tech employees in the industry grows. Companies increasingly are looking to central Denver, including River North, Platte Valley and Lower Highlands for more talent, amenities and transportation.

This year, we’ve already seen Boulder startup SendGrid, a transactional email delivery and management service, relocate to downtown Denver to accommodate growing talent needs.

Negotiated Terms

Approximately 636,000 square feet of energy space was put on the sublease market in 2015, and nearly 20 percent of it was reabsorbed – mostly to other energy or law firms. This is due, in large part, to the fact that the majority of subleases from the energy sector are heavily private office.

What we’re seeing now is energy firms are signing new leases or renewing with smaller footprints and shorter, more flexible terms. In this market, firms can sometimes (but not always) negotiate options such as early termination and shorter lease terms to give themselves some extra peace of mind, given the state of the market.

While energy and law firms continue to seek a more traditional private office configuration, we’re seeing an increase in open space users in industries such as tech, health care and finance. These industries, along with the traditionally more creative industries, are forgoing the traditional private office configuration in favor of more collaborative models for their office space.

As the millennial generation continues to enter the workforce, the effect of their changing workstyle preferences is beginning to manifest itself in a more meaningful way. For example, KPMG, aware of its client base and talent pool, introduced one of its high-tech “ignition centers” in downtown Denver. Instead of mahogany and offices, an open floor plan features first-in-class collaborative spaces and state-of-the-art technology to facilitate stronger teamwork.

Available Deals

As mentioned above, in the first quarter, we did see a negative net absorption of office space. We anticipate that as more sublease space is added to the market, downward pressure on asking rates will begin to curb the escalation the market is experiencing.

Even in the current market, there are below-market deals to be had for high-credit companies as landlords and sublandlords will always give the best terms to the strongest tenants in the market.

The best thing tenants can do right now is stay informed about what is happening in the market. There is no substitute for staying ahead of your leasing needs.

Featured in June issue of Office Properties Quarterly.

Edited by the Colorado Real Estate Journal staff.