Where are large blocks of urban office space?

Peter Knisely
NAI Shames Makovsky

Since the market began to rebound in 2011, Denver’s landscape has changed significantly, both economically and physically.

The new and improved amenities in central and downtown Denver have opened the door to a new lifestyle for its residents and improved benefits for its businesses. The population density in Denver’s core continues to increase, and the number of large companies relocating to central and downtown Denver from out of state or from other Denver submarkets has risen exponentially.

This population and employment growth have pushed developers to construct new multifamily and commercial real estate projects across Denver’s central submarkets, particularly in the central business district, Lower Downtown, Platte River/RiNo and Cherry Creek.

Ana Sandomire
NAI Shames Makovsky

Despite significant new development, vacancy rates in Denver’s CBD continue to fall. The supply, coupled with the corresponding demand, has pushed rental rates to record highs while pushing vacancy rates even lower.

According to CoStar’s latest statistics, there is 1.57 million rentable square feet of office space currently under construction in LoDo, the CBD and Platte River/RiNo. However, the new construction starts and the availability of large blocks of urban office product outside the CBD are extremely limited.

Today, there is no new, significant office construction in Golden Triangle, Uptown, Capitol Hill or on South Broadway that could bridge the gap for tenants looking for modern Class A office space that do not want to be in the CBD or RiNo submarkets but still want an urban feel with a higher parking ratio than 1 stall per 1,000 rentable square feet leased. The only new construction in the Uptown and Capitol Hill submarkets is medical office and one new project of 63,000 sf at 9th & Colorado. One of the few large block offerings in these submarkets is the redevelopment project underway at 777 Grant St., which when complete will offer over 68,000 sf of office and 4,775 sf of retail space.

The Cherry Creek submarket is the one urban market that has taken the leap and competed directly for credit tenants that have been looking at new construction in the CBD. The development of 200 Columbine, Civica, Financial House and 260 N. Josephine over the past few years has boosted the office market significantly, and these buildings leased up at a record-setting pace. Currently, the only large-block office option in Cherry Creek is the 28,625 sf over three floors at 2955 E. First Ave., at the corner of First Avenue and Milwaukee Street.

Today, a large tenant looking to lease 20,000 sf would have 12 options available between downtown, and Colorado Boulevard and Interstate 25, and only four of those options would be considered Class A space, most built before 1985. In comparison, for that same 20,000-sf tenant, there would be 47 options among the CBD, LoDo and Platte River/RiNo areas, and 20 of those options were built after 2000.

One challenge for developers building outside the CBD is the need to build more parking, particularly for sites that are not within walking distance of a light-rail station. More parking means greater cost due to expensive parking structures or the need for more land, which is also limited and more expensive.

While the effects of Denver’s CBD growth have been felt marketwide, with the exception of Cherry Creek, nearly all new significant office construction has been within 1 mile of a light-rail station. Because of the limited availability of public transportation, new buildings need to offer increased parking ratios compared to other submarkets.

Capitol Hill and the Colorado Boulevard corridor have traditionally been able to offer space at dramatically lower rates than the CBD. And while sites are available in these markets for new office development, these same sites also are being pursued and purchased for multifamily development and, in many cases, simultaneously taking parking lots that provided additional surface parking for office tenants in the area.

Denverites will learn to adapt to increased traffic, limited parking and expanded light-rail service. Urban infill areas will continue to attract increased density and the ability to work and live in an urban environment.

Some of Denver’s older and established neighborhoods like Capitol Hill and Baker will experience dramatic housing growth with much higher densities than what we have seen in the past. The relative proximity to the CBD coupled with new and improved housing stock will change the feel and dynamics of these neighborhoods. If demand continues to grow, some tenants will not be able to pay the costs associated with conducting business in and around the CBD, which will push new construction in areas that have been underdeveloped over the past several decades.

The current trend indicates that the majority of tenants desire to be located in or near the city center to be in close proximity to retail, restaurant and entertainment amenities. However, as new development opportunities begin to disappear, landlords and tenants will pursue other locations where growth opportunities exist in order to achieve the same feel and energy of the central core. Which submarket will be next?

Featured in CREJ’s September 2019 Office Properties Quarterly

Edited by the Colorado Real Estate Journal staff.