Odds Stacked Against Office Market Recovery

That was part of the message Dorfman told about 400 business leaders attending a recent National Association of Industrial and Office Parks breakfast meeting.

In order to return to a healthy market of about a 10% vacancy, the office market needs to absorb 8 million sf of space, he says. In order to achieve that, it will take the creation of 30,000 office jobs.

But that will be a monumental task, Dorfman notes.

"It will take approximately five straight years of all existing companies increasing head count by 3% annually and/or companies relocating operations to Denver," he says.

During the peak year of Denver's recent economic expansion, approximately 14,000 new office jobs were created correlating to near 5% growth, while now he expects office job growth of 2% to 3% annually.

Some other key points, Dorfman says, are:

* After almost a decade of near record activity and absorption, Denver's office market felt the effects of a national recession.

* Negative absorption of more than 3 million sf over the past five quarters.

* Denver experienced the downturn to a greater extent than other areas of the country because of our dependency on technology and telecommunications.

* Current availability, including sublease space, stands at nearly 20% which results in the most available office space since the office market downturn of the 80's.

* From 1999 to present, overall availability rates more than doubled which resulted in net effective rental rates being reduced by as much as 50% in certain submarkets.

"The statistics are shocking given how quickly the market was transformed," Dorfman says. "Less than two years ago, Denver's market was fueled by great optimism and boasted record low vacancy rates. The (construction) crane once again became the state bird. They were visible in almost all metro area submarkets and more than 10 million sf of office space was added to the market. While I would like to be optimistic, I must be realistic, I am afraid that there is more negative fallout to be realized in our market. Corporate America and local landlords will both contribute to more desperate market conditions."

He notes that the local economy continues to struggle and he sees more bankruptcies, restructures and corporate downsizing that will add more office space to the market.

"Landlords who have realized the depth of this recession and the timeline for recovery have gotten very aggressive," Dorfman says. "Owners of class A and B buildings are now competing for the same transactions offering tremendous savings to tenants. They are realizing income below pro forma is better than total vacancy. Transactions completed six to 12 months ago, where landlords really stretched, now look very good to them as lease rates have continued to decline.