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Page 8 — Office Properties Quarterly — December 2018 www.crej.com We’re givingDenver a standing INOVAtion UPROPERTIES.COM MINNEAPOLIS DENVER UP congratulates the Denver development team for its creative vision at INOVA Dry Creek. By providing a high value product at attractive pricing, alongwith “go big or go home” innovation, you inspired 100 percent pre-leasing with anchor tenants Comcast and Travelers Insurance. Contact United Properties Denver team for an innovative, big-thinking approach to your commercial space needs at 720.898.8866. INOVA Dry Creek 7250 Havana Street, Centennial 1125 17th Street, Suite 2540 | Denver, CO 80202 | (303) 515-800 0 | h lp.com *by the Denver Business Journal and Mortgage Bankers Association ** by Denver Business Journal Holliday Fenoglio Fowler, L.P. (“HFF”) a licensed Colorado real estate broker. #1 Denver-Area Commercial Mortgage Company from 2012 -2018 * #2 Denver-Area Commercial Real Estate Brokerage Company in 2018 ** ON THE MARKET TRINITY PLACE Property Sale Office 195,753 SF Denver, CO CLOSED: NOVEMBER ’“”• CHURCH RANCH II Property Sale STNL Office 63,057 SF Westminster, CO CLOSED: NOVEMBER ’“”• BLOCK „…† Financing/ Construction Loan Office 595,039 SF Denver, CO ON THE MARKET ‡„ˆ „‰TH STREET Property Sale Office 436,455 SF Denver, CO CLOSED: MARCH ’“”• „……ˆ LINCOLN Property Sale Office 284,604 SF Denver, CO CLOSED: MAY ’“”• „‹‹„ & „‡ˆ„ „‰TH STREET Property Sale Two Office Properties 411,438 SF Denver, CO Market Insights I teamed up with Sam DePiz- zol, Newmark Knight Frank’s executive managing director, to discuss market insight and highlights of downtown Den- ver’s office market. • Douglas: What is your forecast for absorption in Denver’s down- town office submarket? • DePizzol: I predict that overall absorption in Denver’s downtown submarket will top 1 million square feet per year, through 2021. To put things in perspective, Denver’s downtown office inventory has increased by 13 percent in the last four years, all of which has been absorbed despite commanding record-high rental rates. The last time downtown Denver saw a four- year run of robust absorption, totaling approximately 1 million sf per year, was in the early 1980s, when the Denver skyline essentially deliv- ered. The average annual absorption in downtown Denver from 1980 to 2017 was 322,055 sf, according to NKF Research data, much less than the forecast annual totals for 2018 to 2021. In fact, the last time full-year absorp- tion in downtown Denver totaled 1 million sf was 2006, a year of rapid expansion following recov- ery from the 2001 downturn in which absorption outpaced supply by a factor of 2:1. Given that the vast majority of new construction is Class A product and Class A buildings account for almost 70 percent of the downtown office inventory, the lion’s share of future absorption will be in the Class A sector. • Douglas: Will supply keep up with this robust demand? • DePizzol: This strong perfor- mance will lead inevitably to a shortage of large blocks of Class A space in Denver’s core downtown. We are tracking nine contiguous blocks of space 75,000 sf or larger available in downtown Denver as of November, and that number will soon be down to five, taking into consideration current deals in the works. Though the downtown office pipeline currently contains six projects, totaling 1.2 million sf under construction, we are not by any means “over our skis” on new product. New construction will slow in 2019 and 2020, with under 400,000 sf delivered each year, and will increase significantly in 2021, with an expected 1.2 million sf of new product. The relatively small deliveries in 2019 and 2020 will contribute further to Denver’s large block shortage overall. • Douglas: What are the implica- tions for landlords? • DePizzol: Continued strong demand and the upcoming lull in the development pipeline will encourage overall downtown vacancy to plunge 450 basis points by 2020, a decidedly landlord market. This growth has pushed organic demand into mature Class A buildings located in the Skyline and Uptown micro markets, and this trend will continue. Just a few years ago, demand was concen- trated in the Lower Downtown submarket, so this “rising tide” is beneficial to owners of diverse asset classes all over downtown. This continuing demand for new product will trickle down to older product, causing rental rates to appreciate 3 to 5 percent annually over the next few years. • Douglas: What are the implica- tions for tenants? • DePizzol: The potential lack of large blocks of space and cor- responding rental rate increases mean that companies looking at relocating to or expanding in Den- ver will have to act quickly and decisively to meet expansion needs or wait until relief comes with additional new construction. Over- all rental rate increases driven by demand and escalating construc- tion costs for new product mean A discussion about the downtown Denver market Lauren Douglas Director of research, Newmark Knight Frank Sam DePizzol Executive managing director, Newmark Knight Frank Please see Douglas, Page 19