Office Recovery Could Begin This Year

Rental rates, it notes, declined only slightly by the end of the year in most submarket, and now appear to be stabilizing. Also, the amount of subleased space on the market last year dropped 7% from year-end 2002.

But the market is missing one crucial component—jobs. "Job growth will be the catalyst to propel the office market forward, and Denver has not yet seen any significant new jobs," the Grubb & Ellis report notes.

"Without job growth and the consequent need of additional office space to drive the market, the biggest motivator within the market today is price," the report adds. "Rental rates will continue to decrease through at least the first quarter of 2004, and then will plateau during the remainder of the year."

The report says a noticeable recovery will begin this year, but it will be a slow one. It compared the recovery in this current cycle to when the last downturn occurred in the late 1980s and early 1990s.

"We expect net absorption levels to be positive, but not significantly improve during 2004," according to the report. "Job growth is not anticipated to post gains until at least 2005, but once new jobs are created we expect the office market to experience another period of sustained growth."However, the market is not projected to reach a point of equilibrium of about 10% vacancy rate, until the latter part of this decade, according to the Grubb & Ellis report.

It puts the current CBD vacancy rate at 18.5%, the suburban vacancy rate at 22.5%, for an overall average of 21.4%. It puts the asking rental rate for class A space at $24.30 per sf and class B space at $18.60 per sf Downtown. The asking lease rates are at $18.80 for class A space and $15.70 per sf for class B space in the suburbs. That puts the overall class A asking rental rate at $20.75 per sf and the overall class B space at $17.15 per sf.

However, brokers agree that what landlords ask for and what they get in today's soft market are two different things. Larger, credit worthy tenants receive especially sweet deals in this market.