Office Market Report Shows Negative Absorption

While most submarkets fared poorly, the class A segment had a respectable quarter with 272,986 sf of net absorption. The data illustrates that newer, well-located properties continue to benefit from a "flight to quality," according to Mark Larocque, research director at Trammell Crow.

Class A buildings saw their direct vacancy decline a tenth of a point to 17.6%, while class B properties' vacancy rose 1.3 percentage points to 18.9%.

Sharp gains in productivity and still shaky business confidence are limiting hiring in many industries, while others remain burdened by huge over-capacity, Larocque says. "Of particular concern to the local office market is the health of the state's advanced technology sector, a major growth engine in the 1990s," Larocque notes in his report. "Tech and telecom appeared to be stabilizing after losing tens of thousands of jobs since 2001, but no signs of a major comeback are evident. While layoff announcements have declined significantly, MCI announced in March the closing of a call center in Glendale, putting 800 out of work. We expect the employment gains in financial services, education and health services, professional and business services, and leisure and hospitality in 2003 to continue into 2004. On the other hand, the information sector, trade, transportation, utilities and government will likely see further payroll cuts."

In the first three quarters of last year, the office market appeared to be stabilizing. But in the last two quarters, the direct vacancy rose 1.3 percentage points.

The vacancy rate, including subleased space, rose to 22.3% and the average rent fell to $17.92 per sf, down 5.5% from $18.96 per sf in the first quarter in 2003. The average rental rate fell 1.5% from $18.20 in the fourth quarter.

"It all starts to add up," Larocque tells GlobeSt.com. "Especially since we were hoping the market was going to start to show some improvement…It appears Denver's office market recovery will be postponed further, until employers are forced to hire additional workers in order to maintain productivity gains at their recent lofty heights."

Submarkets with high exposure to tech companies had a disappointing first quarter. The Boulder County, Northwest and Southeast/I-25 markets experienced vacancy increases of between 1.4 and 1.8 percentage points, and combined for a total of 565,786 sf of net absorption. On a positive note, the total volume of sublease space in the three submarkets dropped 15.3% to 2.28 million sf.

However, empty subleased space that has become direct space, is driving up the negative absorption, notes veteran Trammell Crow Co. broker Dan Castleton. But despite continuing concern over Qwest Communications, the Central Business District has not experienced any serious deterioration in fundamentals during the economic slowdown.

Direct vacancy is up just a point to 13.4% in the past 12 months, and the submarket finished 2003 off with positive absorption of 40,444 sf. The CBD is being kept afloat by "Old Economy" companies such as energy, mining and law firms, the report notes.

One positive sign is that development activity has been very light over the past two years, which will help to hasten the office market's eventual resurgence. Just 590,000 sf of speculative construction was completed in 2003, and 787,000 sf is forecast to enter the market this year.