Office Market Shows Signs of Stabilizing

In any case, Fuller still says the vacancy rate remains stressful for building owners. Fuller puts negative absorption in the first half of the year at 400,000 sf, while other companies, again, are putting it at about 50% higher at more than 600,000 sf.

The discrepancies arise from different ways of calculating the amount of space on the market. Fuller says that 600,000 sf of sublease space was absorbed in the first half of the year, leaving 2.5 million sf of subleased space on the market, "down significantly from over five million sf of availability a year and a half ago," according to the report.

"There are currently few large tenants active in the Denver marketplace," the report notes. "Many of the larger tenants have restructured their existing leases, limiting new, large tenant activity for the next year. Oil and gas firms, as well as law firms, medical and defense firms have been most active during the first half of 2004."

The Central Business District, with about 26 million sf, finished the fist half of the year with an 18% overall vacancy rate, according to Fuller. There was 140,000 sf of negative absorption with only 800,000 sf of total leasing activity, It says while top-end rental rates range form $23 per sf to $27 per sf, but only a handful of buildings are commanding more than $20 per sf, the analysis notes.

The Southeast corridor, by contracts, booked 340,000 sf of positive absorption in the first half of the year and accounted for almost 40% of all leasing activity, with nearly 2.1 million sf of gross leasing activity, more than twice the activity of Downtown. "Unfortunately, as we start the second half of 2004, there is still over seven million sf available in the southeast market, equaling a vacancy rate of about 24%."

This has resulted in further decline in rents, especially in class A and class B buildings. But this gives tenants an opportunity to lease higher quality office space on attractive economic terms. "As a result, we are seeing much greater activity in better buildings with tenants moving from lesser quality properties," the report notes.

Fuller notes the first half of the year has been a time of stabilization. "The excess supply of sublease space, which had a significant negative impact on the market, should continue to decrease," in the second half of the year, Fuller predicts. And it expects rental rates to continue to stabilize, "with no notable increases in rental rates in the near future."