January 2011
Commercial real estate market making a comeback in Metro Denver
Metro Denver's commercial real estate market appears to be recovering from the economic downturn, according to data compiled by the Metro Denver Economic Development Corporation (Metro Denver EDC) in its Monthly Economic Summary for January 2011.
Direct vacancy rates in Metro Denver's office market declined between the third and fourth quarters, and the industrial rate remained stable. Notably, direct vacancy in the hard-hit retail market has now declined for five consecutive quarters. Stabilizing vacancy, however, has yet to translate into higher lease rates. Fourth quarter direct average lease rates for office, industrial, flex, and retail properties throughout Metro Denver were all below last year's averages and noticeably below the rates reported when the recession began in late 2007.
"Until lease rates come closer to pre-recession levels, commercial construction volume - which was remarkably low in 2010 - will remain low," stated Patty Silverstein, chief economist for the Metro Denver EDC and president of Development Research Partners.
Data from CoStar Realty Information, Inc. show the direct vacancy rate in Metro Denver's office market eased slightly in the fourth quarter. The improvement suggests the market is beginning to rebound, but recovery will undoubtedly take time; the fourth quarter direct vacancy rate (13.3 percent) was considerably higher than the 11.8 percent rates recorded before the recession intensified. Direct average lease rates for the office market generally trended down throughout 2010 and ended the year at $19.86 per square foot. That rate was down 1.6 percent over-the-year and was 9.1 percent lower than the highest rate reported before the market turned ($21.84 per square foot in mid-2008).
"Until the office market is more fully recovered, development will remain limited," said Silverstein.
Builders completed 1.1 million square feet of office property in Metro Denver in 2010, and three projects - 1800 Larimer in downtown Denver, Central Park Tower in Broomfield, and the FBI Denver Division Headquarters - accounted for almost 85 percent of the total space. As 2010 ended, a mere 450,000 square feet of office property was under construction.
CoStar data show the direct vacancy rate in Metro Denver's industrial market remained stable at 5.7 percent in the fourth quarter. The industrial market has been somewhat quicker to stabilize than other property types, although industrial lease rates declined through much of 2010. The fourth quarter direct average lease rate ($4.67 per square foot) was down 3.1 percent over-the-year and was the lowest rate reported since mid-2005.
Retail construction - unlike industrial construction - continued in 2010, but the total square footage of property completed throughout the year (about 410,000 square feet) paled in comparison to construction volume from prior years. The largest retail project completed in 2010 was a Walmart Supercenter in Broomfield, followed by a 24 Hour Fitness in Douglas County. The IKEA building in Centennial was the largest retail project still under construction as 2010 ended.
While the retail construction market remains generally sluggish, development projects with longer timelines are still under consideration. Spokespeople for Jefferson County say plans for a retail development at Interstate 70 and Colorado Highway 58 are progressing. Outdoor equipment retailer Cabela's has purchased land at the site and will be the development's anchor store. Groundbreaking has yet to occur, though, as right-of-way and annexation agreements for the project have yet to be finalized.
Some positive indicators for Metro Denver's economy include record passenger traffic at Denver International Airport, declining foreclosures, and solid stock performance for Colorado companies. In all, 10 indicators for Metro Denver moved in a positive monthly direction in this report, compared to nine indicators in the previous report. Fifteen indicators moved in a positive annual direction in this report and the previous report.
The Monthly Economic Summary provides a snapshot of metro area economic activity, as well as its relationship to national and regional economic trends.