CREJ

March 2021 — Office & Industrial Quarterly — Page 17 www.crej.com additional space added over the next year as the vacant shadow space transition impacts the market. Our firm defines shadow vacancy as a portion of leased space that the ten- ant is not using. While there is shad- ow space in most office markets, the volume has grown during the pan- demic recession. Working from home has become the norm, and many ten- ants remain hesitant to return to an unsafe office environment. Shadow space is challenging to measure because it is not officially marketed or tracked in industry databases. In order to understand the effect that shadow space will have on the market, it is important to focus on the major tenants in the market as they will have the most signifi- cant impact on the availability and move the needle substantially more. Major tenants like Newmont Mining, Checkr, Allstate and 2U already have taken steps to reevaluate their local footprint, offering an indication for the future of some of Denver’s most significant contributors. Currently, the largest 5% of the downtown tenants make up 26% of the total leased space downtown, and in southeast Denver, the largest 5% of tenants account for 20% of the total leased space. Because shadow vacancy is scarcely tracked, sublease space often provides the best indication of the impact that shadow space will have on the future market. At current levels, a 5% reduc- tion in space by major tenants would account for a 2.5% increase in the total availability rate downtown and a 2.7% increase in the southeast. A 10% reduction would result in 3.5% and 3.7% increases, respectively, and a 15% reduction would equate to a 4.7% increase in each markets. The unquantifiable stock of shadow vacancy means that the market will experience less actual demand for space at least until occupancy restrictions are lifted, and likely lag growth for the foreseeable future. It is anticipated that sublease availability will increase through 2021 by way of a combination of bankruptcies and companies reassessing their space needs. We already have watched this trend come to fruition after notable companies like Ralph Lauren and Salesforce hit the front page of the news recently after they announced plans to decrease their corporate footprints, transitioning to flexible work schedules. This being said, within crisis are the seeds of opportunity. Opportunities are abundantly available for growing office users to take advantage of dis- counted available space within their current buildings, and in some cases, sublease space may offer an oppor- tunity for a user to try out a market before making a long-term commit- ment. Additionally, submarkets that previously posed a high barrier to entry now offer increased opportu- nity for new entrants to establish a presence. While the future of office space remains a bit of a blur, tenants focused on migrating to the Mile High City or maintaining a current foot- print in Denver’s real estate will find a discount that will pay dividends down the road. s jared.balcavage@transwestern.com Continued from Page 1 OFFICE — MARKET UPDATE The sublease market in Denver from 2005-2021. naling the anticipated increase to full steam ahead for office investment as the first half of the year progresses. Core investors favor single-tenant office assets with investment-grade tenancy on long-term leases, and they remain active in this space. The majority of noncore investors are focused on the highest-quality assets, with weighted average lease terms over six years in the most compelling submarkets. Expect many investors to maintain this defensive posture until the distribution of vaccines creates a point of herd immunity. Select owners of transitional/ unstabilized office buildings with some lease rollover risk are begin- ning to test the market. Fortunately, valuations are assisted by accretive debt options provided by debt funds that have reemerged and are quot- ing higher leverage and lower cou- pons than they have in the past nine months. Coupled with an anticipated flurry of leasing activity in the second half of 2021 from the reasons stated above, we are confident in Denver’s resilience, particularly in the office market, during these disruptive times. s larry.thiel@am.jll.com jason.schmidt@am.jll.com Thiel Continued from Page 4 Are your tenants uncomfortable? We can help. www.cmimech.com 303.364.3443 We love solving complicated mechanical problems.