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Denver’s office space market remains steady, retail prepares for a return to spending

Denver’s office commercial real estate market finished steady by the end of the fourth quarter, unlike the retail scene which was affected by rising inflation, according to several area brokers.

The office market had more than 340 transactions totaling 1.6 million square feet in leasing activity during the fourth quarter across the metro Denver area, a decline of 25% in overall leasing activity compared to the year prior according to a report from Savills. In total, 2022 leasing activity was 6.8 million square feet, which was flat compared to 2021 and down 23% compared to 2019, which saw 8.6 million square feet in leasing activity. The construction pipeline has 4.6 million square feet of office space in development, according to the report.

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Overall, the asking rental rate was mostly steady, dropping by one cent per square foot compared to the third quarter. Subleasing space reached an all-time high of 6.3 million square feet, which is 47% more than there was a year ago. This amount of sublease space drove the overall availability of Denver’s office space, reaching 26.5% by the end of 2022.

Several trends drove the amount of available office space available, whether it was companies downsizing and reducing jobs or companies questioning whether the amount of space being rented is actually necessary now in a post-pandemic world, according to Brendan Fisher, senior vice president and market leader in Denver for Savills.

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“It’s a sign of the overall health of the market,” Fisher said. “So when vacancy is low and there’s not a lot of sublease space we would typically say it’s a healthy or strong market. By that, we usually mean that the landlords or the owners of the office buildings, from a negotiating position, are in a better position because it’s low supply and high demand.”

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The retail sector was hit by the impacts of inflation on consumers, who started to lean toward buying essentials like groceries and gas toward the end of the year according to JLL. Consumers also spent money on services and experiences now that the pandemic has ebbed. However, retail and service tenants are pushing to expand based on predictions that customers will return.

In 2022, net absorption (the amount of space leased) was double what it was right before the pandemic hit, according to the JLL report. Retail tenants absorbed nearly 76 million square feet in the market in 2022, which is the highest absorption since 2017. However, the size of new leases lowered to about 3,185 square feet in the fourth quarter.

“Despite significant and varied headwinds, real output grew during 2022 and GDP is forecasted to grow 1.7% for 2022,” Ryan Severino, JLL’s chief economist, said in the report. “A technical contraction in the first half of the year was followed by brisk growth in the latter half. The fastest inflation in roughly 40 years resulted in the quickest interest rate tightening in roughly 40 years.”

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