Denver office market stable, report shows

Overbuilding not likely downtown, brokers contend

By John Rebchook, Rocky Mountain News (Contact)

Published May 21, 2008 at 7 p.m.

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The buzz about new office building construction has some observers resurrecting the old joke about the crane once again being Colorado's state bird.

The perceived construction craze also has led to fears of overbuilding and a crashing of lease rates, which have had a meteoric rise in recent years, especially in downtown.

But an in-depth study by two agents at CB Richard Ellis, Sam DePizzol and Greg Holm, shows that this boom pales in comparison with several predecessors'. And adjusted for inflation, today's office lease rates are 49 percent of what they were in the early 1980s, the report notes.

Given the tight capital markets, there seems little chance that speculative building, with little pre-leasing, will go forward, they and other experts say.

A perfect example is the recent announcement that Westfield Development, the development arm of Frederick Ross, has started construction on its 22-story building at 1800 Larimer St. - the first major downtown office tower in more than two decades.

Xcel Energy is going to move its headquarters into the building, taking 330,000 square feet, almost 70 percent of the space.

"Look, that's only going to bring four floors of new space to downtown, with the majority of the space going to Xcel," DePizzol said. "Another 100,000 square feet downtown in a building of that quality is no cause for concern."

Holm wrote in the report: "There is currently speculation that the Denver office markets are on the verge of a significant change, based on turmoil in the capital markets, new office building construction and recession."

The changes in market conditions will mean that investors will have to own buildings longer than anticipated to get their money back; sellers are finding fewer buyers; values of buildings have dropped from their historical highs; and tenants are more reluctant to sign leases because they think landlords will drop rates and offer more concessions.

Neither Holm nor DePizzol expects a big drop in downtown lease rates, but the steep rise seen in recent years will stop, they said. Rather, they expect a stable office market the next two to three years.

In 2006-2007, only 1.4 million square feet of office space was constructed in the Denver area, with an additional 3.8 million square feet expected through 2010.

That 5.2 million square feet is an increase of only 1 percent annually, given the base of 103 million square feet.

From 1978 to 1985, 51 million square feet of office space was constructed, starting from a base of 25 million square feet.

Not only did that more than double the size of the market in seven years, but that equates to an average annual increase of 14.2 percent.

From 1996 to 2001, 25 million square feet of office space was constructed from a base of about 78 million square feet, adding an average increase of 3.9 percent per year.

The first building boom, fueled by favorable real estate tax laws and the energy boom, ended when the price of oil collapsed. The second ended when the Internet and telecom train derailed, costing the area more than 70,000 high-paying jobs and leaving in its wake low-priced subleased office space, now mostly occupied at much higher rates.

The downtown market is now more diversified, Holm and DePizzol argue.

Tom Clark, executive vice president of the Metro Denver Economic Development Corp., agrees with the brokers that with conservative underwriting standards, lenders won't provide money for office construction without substantial pre-leasing.

Last week, Clark gave a tour of downtown to some Lufthansa Airlines executives, who hadn't been to Denver for two or three years. That allowed Clark to see downtown through their eyes.

"Downtown seems like a very vibrant place, especially if you haven't seen it for a while," he said.

rebchookj@RockyMountainNews.com or 303-954-5207

• May 23, 2008

  12:31 a.m.

  Suggest removal

  DOT writes:

  "There is no real estate bubble"...hmmm...deja vu.

  Holm and DePizzol argue that DT mkt is diversified.
  So is this recession!!! Their point is moot.
  If all businesses are affected, diversification is no protection!

  And "substantial pre-leasing" won't protect lenders from future
  rent loss from tenants with declining profits or in bankruptcy.
  Can you spell FORECLOSURE?

  Related Note: Have you counted the high number of "FOR LEASE" signs
  in the DTC area lately?!

  Economics 101: Increasing Supply (city-wide vacancies) and Decreased Demand (widespread business decline) equal PRICE DROPS

  Question: Why are realtors quoted in news always so OPTIMISTIC???
  Kind of like the Botox of the Business World...Never any wrinkles.

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