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DENVER-Negative net absorption of nearly 431,000 square feet has put a damper on this city’s office market, which has turned in favor of tenants as others have throughout the country after remaining stronger than some until the effects of the economy caught up with it. “Denver’s commercial real estate marketis clearly feeling the consequences of persistent turmoil in the financial markets, a credit market implosion and the national recession,” says a second-quarter office market report from CB Richard Ellis. An outlook from Grubb & Ellis points out that, “Perhaps the greatest long-term threat moving forward is the impact of increased regulation at the state and federal level, which has crimped oil and gas industry growth” that formerly was keeping the office market going because of the region’s active oil and gas industries.

The loss in occupied space resulting from the negative net absorption in the first quarter increased the direct vacancy rate 40 basis points to 15.4%, according to the CBRE report, which lists the total availability rate, including sublease space, at 21.3% at the end of the quarter.

Grubb & Ellis points out that the growing volume of sublease space means that tenants “will find increased opportunities with landlords willing to design creative lease terms and structures by blending existing sublease space with alonger-term direct lease.” The Grubb report notes that these leases are typically beneficial to both parties, helping the tenants with low rates early in the term during the current economic downturn, and providing the landlord with an in-place tenant. “Landlords are also able to offer non-monetary concessions that can be important to a tenant, but are often unavailable from a sublessor company such as parking, tenantimprovements, etc.,” it says.

Tenants will also find lower rates because of the worsening market conditions and reduced activity, according to CBRE, which pegs metro-wide average asking lease rates in the second quarter at $20.69 per square foot on a full service basis, down from the first quarter, as landlords continue their effort to maintain occupancy and cash flows by offering aggressive rates and rent concessions.

Despite the lure of these lower rates, “Tenants’ attitudes remain conservative with a focus on short-term savings and aneffort to delay real estate decisions until the market improves,” CBRE points out. As a result, it says tenantsare more frequently pursuing renewal and extension options over the cost associated with moving to new space.

Despite the still-stagnant credit markets and the general malaise in the investment sales arena, CBRE notes, Denver did register a significant sale in the closing days of the second quarter. A trophy Downtown asset, Seventeenth Street Plaza sold for an estimated $135 million or $202 per square foot to HRPT, a Massachusetts-based REIT. Nationwide, the deal was the fifth-largest office transaction to close year-to-date, according to CBRE.

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