(To read more on the net lease market, click here.)

DENVER-Beginning next year, tenants should brace themselves for landlords to raise both asking and effective rental rates, according to a recent report by the Denver office of Grubb & Ellis. The report says with so many office buildings being sold in 2005, new owners will be pushing for pro forma rents to justify the sales prices.

The increase in effective rates will be greater than that of asking rates, as concessions will continue to decline, Grubb & Ellis notes. The spread between class A and class B rates will increase, as will the spread between class B and class C, albeit at a much slower pace, partially due to the large amount of vacant flex space that effectively targets some for these tenants, Grubb & Ellis explains.

The Northwest, Downtown and Southeast submarkets are leading the charge, accounting of more than 80% of the absorption in 2004. Smaller markets with less class A space may suffer in the short term as companies seek quality space before rates rise significantly, the report predicts.

The growth will predominantly be led by smaller to mid-sized tenants, as no significant increase in large tenant activity is anticipated. The only downside for owners is rising energy costs, which will decrease landlord returns.

The energy sector, however, will continue to be one of the bright spots in leasing activity. Energy, aerospace and bioscience sectors will see job growth rate continuing in 2006. Colorado’s growth rate of 2.6% is besting the national average of 1.7%, Grubb & Ellis notes.

Also, merger and acquisitions are slowing down, Grubb & Ellis notes, and that bodes well for Denver. During the latest round of M&A activity, Denver lost several large corporate headquarters. The financial and service sectors also are expected to continue their expansion in 2006, the company notes.

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