Report Shows Office/Flex Market Has Hit Bottom

"The market appears to have hit bottom, as tenants have ceased returning space to the market," according to the report. Transwestern notes that tenants this year returned 46,000 sf of space to the market, after increasing by only 18,000 sf in all of 2002.

The direct office/flex vacancy rate inched up to 13.8% from 13.6% at year-end 2002 and 13% a year earlier. When subleased space is included, the vacancy rate is 14.6%, down from 14.7% at year-end 2002.

Transwestern expects the office/flex vacancy rate to remain stable through the balance of this year, but should drop slightly next year as the economy improves. However, that won't provide any relief to landlords, who are saddled with declining rental rates. That trend will continue, Transwestern predicts.

Rents now average $8.89 per sf, triple net, declining at an annualized rate of 3.5% so far this year, after falling 4% in 2002."Office/Flex rents will likely soften a bit further over the next year as market conditions remain soft," according to the report. "As the economy builds momentum in 2004, rents will firm."

Meanwhile, investors are giving the office/flex market a cold shoulder. "There were no significant office/flex investment sales transactions recorded in metro Denver in the first half of 2003," the report notes. "The market for flex properties has suffered on a national level, as tenants requiring this space type were hit hard by the recession."

Last year, four investment sales of office/flex properties traded hands, the report notes, at an average sales price of $103 per sf.However, the Rocky Mountain College of Art and the University of Colorado's Federal Credit Union each bought office/flex properties this year for their own use, Transwestern notes.