In any case, brokers agree the sudden appearance of sublease space, red hot just a year ago, is returning to a more normal kind of market. "This is not the end-of-the-world type of thing," Phenicie says. He and Hart have leased 20,000 sf in two deals within two weeks. "I think it is actually good news," adds Hart. "It allows companies to get into the market who couldn't get into it a year ago. They had been shut out."

The corridor's vacancy rate is 8%, including the sublease space, whereas the direct rate stands at 1%. "There's no problem along the corridor at all," contends Garel. "Basically, the direct vacancy rate is about zero." In fact, the market is so healthy that there is room for several new buildings to be constructed, he says.

The sublease space is attributable to three factors, Hart and Phenicie say. First, companies are trying to get rid of excess space that they leased a year ago when they thought they would be growing faster than they are today. Second, companies have merged or been acquired, so they are eliminating redundant space. And, it's the impact from a shakeout of dot-com companies. Most of the dot-com failures will work their way through the system by the middle of the second quarter, Phenicie predicts.

Lenders have done a good job of forcing property owners to lease to creditworthy tenants, often requiring them to put up letters of credit, they say. "By bankers controlling the debt, developers couldn't just throw up buildings, which is one reason we have such a tight supply," Hart says. But it also has made it harder for property owners to take chances on companies that might be in business for a couple of years, but haven't yet taken their product to the market, he explains. Those types of companies are perfect candidates for the subleased space because the lender doesn't have to judge them creditworthy.

Tenants who are looking for the type of sublease deals offered by Denver-area property owners during the mid-1980s will be disappointed, say the brokers. At that time, some owners had been offering discounted rents, up to a year of free rent and cash incentives.

"They're not wholesaling the subleased space," Phenicie says "It costs as much as direct space. Sometimes it costs a bit more. It's all built out and some of the tenants want to recoup some of their costs."

And despite the addition of sublease space, the construction of new multi-tenant office buildings will continue, they say, especially as Interstate 25 is widened, a project that starts later this year and will create bottlenecks that are expected to last until the massive project is completed in eight years.

"For the first time, we're seeing tenants from the southeast looking at the US 36 corridor," Hart says. "In the past, they were coming from Boulder or from out of state."

Many of these companies will keep their main offices along the southeast corridor, but will open smaller satellite offices along the northwest corridor. "It's funny, but these companies aren't interested in the subleased space," Phenicie says. "They want their own deals."

Phenicie says tenants last year had been snapping up office space even before construction started and virtually all buildings were fully leased by completion. "That's not a normal market," Phenicie says. "Some people are getting worried about what's happening, but what we're seeing is just a normal, strong market. Last year, going to work each day was like going to a party."

And Hart says it's only a matter of time before Colorado starts to grab high-tech companies that were planning to expand in northern California. "The energy crisis there is going to get worse before it gets better," Hart says. "And our lease rates ($16.50 per sf triple net to $23.00 per sf triple), is a fraction of what they pay in Silicon Valley. I think companies that are planning to build three million sf campuses in California will be re-evaluating their plans and I think some of them will be looking at Colorado."

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No Red Flag Rising Over Available Sublease Space

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