DENVER-The area office market recovery remains elusive, according to a first-quarter report by Grubb & Ellis. While it appeared the market had hit bottom late last year and was poised to begin slowly recover, Grubb & Ellis reports a new round of negative net absorption has caused the overall vacancy rate to rise to 22.4%.

The report shows 322,800 sf of negative absorption in the first quarter. Of that, 295,084 sf is in the suburbs.

“The bottom line is that for Denver’s office market to improve, companies that lease office space need to create more jobs and hence will eventually need more space to accommodate these new employees,” the report notes. “Unfortunately, new job growth for Denver is forecasted at just 1.2% for 2004. This growth rate will not translate into a need for more office space, but at least there is some job growth projected.”

If the national economy picks up, Denver likely will benefit about six months later, the report notes, as Denver tends to lag the national economy and the national commercial real estate market by about six months.

That may be little comfort for property owners in today’s market, although it is good news for tenants.

“Unfortunately, with every submarket posting double-digit rates, landlords must keep their rental rates down in an effort to attract tenants to their buildings,” the report notes.

In the first quarter, Denver’s overall average rental rate lost another 0.8%, ending at an overall average of $17.50 per sf. For class-A space in the suburbs, the overall average rental rate was $18.50 per sf. For the entire metro area, the overall class-A average lease rate was $20.05 per sf.

For class-B space, the overall suburban average rental rate was $15.94 per sf, while for the entire market it was $16.60 per sf.

Grubb & Ellis advises tenants to take advantage of low rates while they still can. As the market slowly improves, landlords will begin to pull back on aggressive concessions and hold steady on firmer rates.

“The window is still open for tenants, but they should not hesitate, as they may regret their lack of action by the latter part of 2004,” the report notes.

Property owners, meanwhile, need to continue to aggressively go after tenants to remain competitive.

“The need for significant concessions should ease by the second half of 2004, but rental rates will not be able to grow for some time,” the report cautions.

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