If your company needs new office space or wants to lock in your current space longer term, now is a good time to consider exploring your options.
It’s no big surprise, office vacancies in SES Denver have increased significantly in the last 2 years from 11.5% at the beginning of 2020 to the current 16.4% as Covid forced the close of some offices and remote work reduced use. In addition, the amount of Sublease space on the market increased 70% to 1.5M sf the equivalent of about 10 suburban office buildings, making up much of the total negative absorption of 2M sf.
However, what is surprising is that the average asking rate actually increased 5% or $1.32 psf to $27.47 psf over this period contradictory to rising vacancies and negative absorption. Possible explanations include: effective rates are less due free rent concessions increasing; Landlords holding tough on rate due to other rising costs of operating expenses and tenant improvements; and Lenders not allowing Landlord’s to lower rates.
Tenant Improvements that use to cost in the $30 to $40 psf range can easily cost in the $60 to $80 psf range. And since the Landlord often pays all or most of this cost, the Landlord’s net effective rates have dramatically decreased. A $30 psf increase in tenant improvement cost amortized over a typical 5 year lease equates to a loss of $6.00 psf in the effective rate of the Landlord, which means the average asking rate increase of $1.32 psf only partially offsets this loss.
Another surprising trend is that Class A space has suffered more than Class B or C space with the biggest increase in vacancy of 6.9% to 18.8%. A commonly reported theme is that there has been a flight to quality, but the statistics don’t bear this out. Speculating on the reason, perhaps the bigger Fortune 500 type of companies occupy more of the Class A space than the more regional or local smaller companies. And the Fortune 500 types of companies have been more likely to send employees home to work than these smaller companies. But going forward, as companies fight to retain and attract good employees, I do think there will be more of tendency toward higher quality buildings.
What does this mean for Tenants/Companies? Tenant’s are in a stronger position due to having more choices both from increased direct space and subleases. Sublease options often come with discounted rates and free furniture. Landlord’s will have to be aggressive on their ultimate economics or otherwise increase the value of their offerings to compete.