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Delta variant slows recovery in metro Denver office market

Delta variant slows recovery in metro Denver office
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The rising number of COVID-19 cases this summer caused employers in metro Denver to hit the pause button on plans to bring workers back, contributing to a continued rise in the region’s office vacancy rate, according to a third-quarter update from Newmark, a commercial real estate brokerage.

“Tenants are keeping a close eye on the impacts and remain cautious, which has affected re-boarding plans. Some office users have delayed return to the office dates; I have had several large tenants push back return dates to January 1, 2022,” said Sam DePizzol, an executive managing director with Newmark in Denver, in an email.

The region’s office vacancy rate increased to 21% from 20.7% in the second quarter, with the rise in vacancies concentrated in Class B office space, the next tier down from premium Class A space, where demand increased. It marked the sixth consecutive quarterly rise in the office vacancy rate since the start of the pandemic when the rate was around 14%.

That said, the gain in the office vacancy rate was much more subdued than the gains seen in prior quarters and rents continue to hold up.

More space continues to come onto the market than what is getting absorbed, with available supply growing by an additional 215,616 square feet in the quarter. That contributed to a “negative” absorption of 2.6 million square feet for the year.

Downtown Denver, which commands the highest average asking rents at $42.27 per square foot, also has the highest total vacancy rate at 24.3%. But it saw 20,102 square feet of negative absorption in the third quarter, a much smaller number than in prior periods.

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The Denver Tech Center had a vacancy rate of 21.3% and negative absorption of 86,742 square feet. The worst absorption numbers came in the western suburbs, where 133,097 square feet of additional space came into the market during the quarter.

Supply chain problems have caused construction delays and complicated tenant improvements, pushing back some moves into the fourth quarter, the report noted. Developers delivered 102,955 square feet of new space last quarter, which contrasts with 1.1 million square feet delivered in the second quarter.

They have hit the brakes on new projects, with just shy of 600,000 square feet of new office space under construction across metro Denver, compared to 1.1 million square feet in the third quarter last year.

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