Office/Flex Market Hurt by Pure Offices

"Although small businesses have been adding workers, competitive rents in office buildings have been siphoning tenants out of flex product," the report notes. "As a result, net absorption of office/flex space was a negative 567,000 sf in metro Denver in the second half of 2003, with most of this decline occurring in the Northwest and Boulder submarkets."

The office/flex vacancy rate, the report says, rose to 18.9% at year-end, compared with 14.7% a year earlier and up from 14.6% in mid-year 2003. Subleased space is not a big factor, as the direct vacancy rate is 17.6%, only slightly below the overall vacancy rate of 18.9%.

The good news is that construction has ground to a halt. Only 85,000 sf of office/flex space was delivered in the metro area last year, compared with 314,000 sf in 2002. And 59% of the space delivered in 2003 was leased upon delivery, up from 26% in 2002.By the end of 2003, there was no office/flex space under construction.

Office/flex rents, not surprisingly, are falling.They declined by 6% in 2003 to an average of $8.53 per sf. Moreover, the investment market for that product line has stalled. There were only four transactions last year, for a total of $24 million.

"The investment market for flex properties has waned since 2001, as tenants utilizing this space type were hit hard by the tech slump," according to the report. Sales prices average $69 per sf in 2003, down from $103 per sf in 2002 and $79 per sf in 2001. "Prices spiked in 2002 as activity was dominated by newer facilities," continues the report.

But the worst may just about be over, according to Transwestern: "We expect the office/flex vacancy rate in metro Denver to stabilize by late 2004 as stronger economic conditions spur demand while no new supply is delivered.