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Bay Area Research Rant: Mile-High Market

By Robert Sammons, Regional Director – Northwest U.S. Research

Denver Panoramic PhotoI’ve been in Denver this week presenting at Cushman & Wakefield’s The State of Real Estate event. If you haven’t been to Denver or it’s been awhile I would highly suggest a trip here. Not only is it beautiful with loads to do but the real estate market is booming – from office to industrial to retail to multi-family. Okay – they do have seriously wacky weather. It was alternately sunny, windy, raining, hailing and then sunny again and that was just on my trip in from the airport! And they have opened a direct train line from DEN to Union Station which I did take. Now it’s having a few teething problems that I won’t go into here but it will be a big feather in this market’s cap going forward connecting not only the airport with the CBD but with the massive light rail system in place (and expanding).

Denver Rocky Mountains twitterOnce you get to Denver, you’ll find a market with one of the lowest unemployment rates in the country – just 2.7% according to Moody’s. Jobs are now at a historic high and are expanding across almost the entire spectrum – from leisure & hospitality to construction to professional & business services. Layoffs within the energy sector were prevalent for a few quarters. But even that area has stabilized more recently. And the fact is only about 4.0% of the metro GDP is involved within the mining (oil & gas) sector compared to almost 30.0% in Houston.

Tech employment is growing here of course. But they are not yet a disproportionate share of the job sector. In fact, according to Moody’s, 7.9% of the total jobs in Denver are in the core tech sector – comparable to the 9.6% figure in Austin but nowhere near the 15.5% figure in San Francisco or the 27.3% figure in San Jose.

A few other factoids on the Denver market you ask? Why of course, here you go!

  • The office vacancy rate has dropped 540 basis points (bps) over the past five years and now stands at 11.3%; meanwhile the average asking rent is $24.56 per square foot, up by 22.6% over the past five years (7.0% in just the last year). Construction has picked up lately with 2.6 million square feet (msf) under construction but inventory has risen by less than 5.0% since 2011. Despite some layoffs by companies in the energy sector, sublease vacancy remains in check at about 800,000 square feet, actually easing since its most recent high of 1.0 msf in the second quarter of 2015.

  • The industrial market has been scorching with an overall vacancy rate of 2.7%, the second lowest of all the major markets following Greater Los Angeles at 2.2%. Not surprisingly, asking rents have rocketed higher by almost 40.0% over past five years. The warehouse sector makes up 62.0% of the inventory for Denver industrial and that vacancy rate now stands at 2.8% with just 3.5 msf under construction.

  • Retail has generally seen improvement in Denver too. Certainly it’s the one property type that has undergone the greatest metamorphosis lately. But with population/job growth strong here, categories such as fast fashion, home improvement stores, fast casual restaurants, fitness/health clubs and yes, even marijuana dispensaries have been or are looking for space.

  • Regarding investment sales, both office and industrial were a bit slower in the first quarter compared to a year ago though that was the case in many markets around the country. Taking their place were both retail and multi-family transactions which were up dramatically. Most of the buyers and sellers have tended to be U.S. based though industrial has caught the attention of buyers from Singapore, China and Canada.

So the takeaway? Denver will continue to benefit from its diversified economy. It should add around 40,000 jobs (25% of those office-using positions) for the full-year 2016. We’re forecasting office rents to increase 5.0% for the year with 2.5 msf of net absorption. Industrial will remain tight with new spec and build-to-suit product not making much of a dent in the vacancy rate with the asking rent hitting a new record. Now if we could do something about the wacky weather…

PS: If you are interested in more highlights and insight from yesterday’s The State of Real Estate Denver event, check out Twitter hashtag #CWforecast (covered yesterday). And/or you can also follow our @CushWakeUS or @CushWakeDenver handles which covered the event.

This post is guest commentary from the latest weekly edition of our Bay Area Research Rant, which you can subscribe to for free by e-mailing robert.sammons@cushwake.com.

Robert_SammonsRobert Sammons is a Research Director for Cushman & Wakefield. Based in San Francisco, Robert’s principal roles include working closely with the C&W research teams across the Northwest – including Northern California, Portland and Denver. Robert is author of numerous documents that delve into a wide variety of real estate and economic trends. He has been a quoted source for all manner of real estate and related economic information in many widely known media outlets across the country. Robert has 29 years of real estate experience as both an appraiser and researcher. He earned a BBA in Real Estate from The University of Georgia and an MS in Real Estate from Georgia State University. Robert is a member of the Urban Land Institute.

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