CREJ

Page 10 — Office Properties Quarterly — March 2020 www.crej.com Market Update C olorado has been an eco- nomic powerhouse in recent years, with the growth in its gross domestic product rank- ing anywhere from ninth to third among U.S. states over the last decade. In 2019, it ranked 11th in the nation in employment growth, and its unemployment rate was among the lowest five. “We can tell a pretty compelling story that Colorado’s economy has been among the leading economies nationally since the Great Reces- sion,” said Brian Lewandowski, executive director of the Business Research Division at the University of Colorado Boulder’s Leeds School of Business. “We were well-posi- tioned for growth because of our industry mix.” One indicator of the city’s growth is its large number of high-earning businesses. A new study places Denver 13th in the nation for growth in businesses with revenues of at least $1 million between 2014 and 2016 (the most recent year when data was available from the U.S. Census Bureau’s American Sur- vey of Entrepreneurs). Metro Denver added 1,483 firms of this size in that time frame, a change of 8.6% – faster than New York, Washington, D.C., Atlanta and Seattle. n Denver’s million-dollar businesses. Denver’s million-dollar companies are mostly small businesses, per the U.S. Small Business Administra- tion’s definition of revenue limits from $750,000 to $38.5 million, depending on the industry. Small businesses are a major driver of the U.S. economy, with 30 million nation- wide in 2015, the most recent year for which data is available. The city’s econo- my is particularly strong in informa- tion technology, telecom, engineer- ing, design and related fields. An example of a fast- growing Denver tech company is Wurk, a maker of workforce management tools that was founded in 2015 and raised $11 million in venture funding in 2019. “We know that we’re a startup state,” said Lewandowski. “On a per-capita basis, we compete well with the innovation economies that people point to nationally” like San Francisco, Seattle and Silicon Valley. All this growth and innovation have an effect on the city’s com- mercial real estate market. Purchas- es of Denver office buildings totaled $3 billion in 2018, and more than half of them are located downtown. The trend also has had specific effects on vacancy rates, rents and construction in the commercial property arena. n Low vacancy rates for commercial property. Denver has enjoyed rela- tively low vacancy rates in com- mercial property over the last few years. The direct vacancy rate for office space in metro Denver in the fourth quarter was 11.6%, down from 12.6% five years ago, according to CBRE research. “Even though we’ve seen new office space built in metro Den- ver, the leasing velocity in the area keeps absorption rates high, especially for that brand-new prod- uct,” said Molly Armbrister, senior research analyst with CBRE in Den- ver. Vacancy rates in Denver’s indus- trial property also tell a promising story about business growth. While industrial vacancy rates have risen from 4.8% in 2015 to 6.6% at the end of 2019, they remain at histori- cally low levels, according to CBRE. Industrial space rental activity was particularly strong in 2015-2016 due to legalization of marijuana in 2014, which sent cannabis entrepreneurs in search of grow houses to rent. n Rising rates for commercial property. Lease rates on Denver’s commercial property have been relatively high in historical terms, though still look like a deal to those in the city’s coastal peers. In fact, a notable number of tech firms are relocating to Denver from Seattle and San Francisco, where rents are 58% and 163% higher than Denver’s, respectively. “Companies, especially those in the technology industry, where we’ve seen a lot of growth, want that brand-new, Class A product and are willing to pay a premium for it,” said Armbrister. “Combined with persistent overall demand, [this] has pushed up the average asking lease rate.” Between 2015 and 2019, Den- ver ranked 15th in the growth of office rent among the top 30 tech markets, and office market rents increased 16% in that time, accord- ing to CBRE. At the end of 2019, the company reported an all-time high in the direct asking lease rate, at $28.80 per square foot, the ninth consecutive quarter that lease rates rose. Lease rates for retail also have been on the upswing: Direct asking lease rates for retail increased from about $17 in 2015 to almost $20 today, according to the research. n Increase in new commercial prop- erty construction. Cranes dot the Den- ver skyline, indicating the strength of new commercial construction in the city. Since 2015, metro Denver has gained about 1 million sf of new space in retail, about 7 million sf of new office space and about 17 mil- lion sf of industrial space, according to CBRE research. Almost 3 million sf of new office space were under construction as of the end of 2019. “Office, industrial and multifamily construction have been a signifi- cant component of commercial real estate activity in the last five years,” said Armbrister. “Denver’s building boom truly kicked off beginning in 2014, and now we’re seeing the results of that in the form of new skyscrapers downtown and in the Denver Tech Center, and record- setting large warehouses.” The growth of million-dollar com- panies in Denver contributes to a booming commercial real estate sector, presenting exciting opportu- nities for real estate professionals and thriving businesses alike. s Denver gets boost from jump in private businesses Katherine Gustafson Contributor, LendingTree