Overall, the office vacancy rate in downtown Denver, which tumbled during the pandemic, rose above 30% by the end of 2023, its highest point in more than two decades.
The total vacancy rate in the fourth quarter of last year was 30.9%, according to a report by the Denver office of the commercial real estate firm JLL. That’s up from 29.9% in the third quarter of 2023.
And it’s the highest vacancy rate for downtown Denver office buildings since the 1990s, according to real estate firm CBRE. A new report by CBRE calculated the total office vacancy rate at 31.5% in the fourth quarter of 2023.
The previous high mark this century was 17%, reached in 2003 and again in 2009, during the Great Recession, Brandon Rosely, a JLL research analyst, said in an email. The downtown Denver office vacancy rate dipped to 11.7% in 2007 and 2014.
The few bright spots in the latest numbers include Lower Downtown, which JLL said had a total vacancy rate of 16.6%, and Class A buildings, whose amenities are attracting tenants. However, downtown Denver continues to struggle to fill offices as a big part of the post-COVID-19-pandemic workforce still splits time between office and home.
The impacts of fewer people working full-time downtown can be felt by restaurants and retailers whose businesses benefit from foot traffic. The Downtown Denver Partnership tracks the daily activity in the area and its numbers for October, the most recent data available, showed the month was at 85% of 2019 levels.
Each month last year surpassed 2022 activity rates, the partnership said. The numbers were driven by visitors and residents, both of which are at or above pre-pandemic levels.
At the same time, the number of downtown employees was at about 60% of pre-pandemic levels for most of 2023, based on data from Kastle Systems, which tracks office occupancy nationwide. Although several companies have issued back-to-work mandates or at least require a few days a week in the office, experts don’t expect an across-the-board return to the-five day routine any time soon.
The fallout from tenants leaving or downsizing extends beyond less business for neighboring stores and restaurants. More loan defaults and foreclosures are expected as property values decline and commercial real estate loans come due.
The Financial Stability Oversight Council’s 2023 annual report said the country has about $6 trillion in commercial real estate loans. The Wall Street Journal reported that research firm Trepp expects more than $2.2 trillion in commercial-debt securities to come due between now and the end of 2027.
Dan McGowan, JLL’s brokerage lead for the Rocky Mountain region, said he anticipates that more office buildings will struggle to pay their loans and could be placed in special servicing, which occurs when a borrower gets behind on loan payments and the lender takes over building management.
“Unfortunately, we’re going to see more and more of that. I think everybody, most owners and lenders, are trying to come up with solutions that work,” McGowan said.
One of the keys is the return of more employees to the office, he added. “It’s critical for the continued growth of the city. It’s critical for the recovery of the economy that we have people in the offices and more activity downtown during the days.”
McGowan believes the city of Denver, the Downtown Denver Partnership and the Denver Metro Chamber of Commerce are doing a good job of reaching out to companies and addressing their concerns, such as safety and security.
One of the factors affecting whether people want to return to the office might be a little tougher to tackle. Class A buildings, which are often newer with more amenities, are faring better in the market. The vacancy rate in those buildings rose about 1.3% in 2023 while vacancies in Class B and C buildings increased by nearly 10%.
McGowan said more than in other downturns he’s experienced, the so-called “flight to quality,” the pursuit of building with a lot of amenities, is driving leasing decisions as companies strive to entice employees from home and back into the office.
“There are sayings all over the place, like you’re competing with the couch,” McGowan said.
A softening in the technology and finance sectors also contributed to the use of office space, JLL reported. McGowan said some high-tech companies have reduced their space, but others have expanded.
There has been a definite downsizing in office space by oil and gas companies. Part of that stems from recent consolidation in the industry, McGowan said.
In 2019, oil, gas and utility companies accounted for roughly 7.7 million square feet of office space in downtown Denver, Thomas Jaroszewski, JLL Denver’s head of research, said in an email. The current figures are 3.94 million square feet and 12.3% of the total inventory.
“I’m a massive fan of downtown long-term,” McGowan said. “But we are going to go through some big challenges over the next few years.”
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