In a few weeks, Kennedy Associates will finish construction of a new, 18-story office building with 400,000 square feet of space, and so far not one tenant.
Welcome to the Denver real estate market.
Businesses are slashing their work force and scaling down operations. The unemployment rate for the Denver metro area was 8 percent in July, up three points from a year ago. And that’s leaving many commercial landlords in a scramble just to hang on to tenants they already have.
“For office demand to really pickup you have to have job growth and we don’t see job growth happening until we’re into 2010,” said Bob Ratliffe, executive vice president of portfolio management for Seattle-based Kennedy Associates. “We’re hopefully delivering an office building that will be attractive to tenants as the market comes back.”
Denver’s commercial property market began to slow a year ago. Since then, vacancies have surged and are projected to outpace the national rates for office, retail and apartment properties this year, according to Marcus & Millichap Real Estate Investment Services.
The worst hit property segment in Denver is the office sector, where vacancies hit 16 percent last year and are projected to climb to nearly 20 percent by the end of this year, according to Marcus & Millichap. The U.S. rate, by contrast, is projected to be about 18 percent.
Sales of office buildings are off 80 percent from where they were just three years ago, according to Grubb & Ellis.
The biggest property to sell so far this year is the 32-story 17th Street Plaza tower. HRPT Properties Trust purchased the downtown building, which has more than 600,000 square feet of space, from J.P. Morgan for around $135 million, according to published reports.
Retail landlords, meanwhile, also are struggling as consumers rein in spending. Many retailers have shuttered stores or failed, driving retail vacancy rates higher. The demise of major chains like Circuit City and Linens ‘N Things has left 50 big-box stores vacant, according to CB Richard Ellis.
To make matters worse, roughly 1.2 million square feet of retail space is under construction.
But Denver has seen worse.
“The market is not horrible,” said Rick Calhoun, who heads up CB Richard Ellis’ Denver office. “I was here in the ’80s when it was in fact horrible. Everyone wishes it were better, but it’s just isn’t as bad as a lot of other cities.”
And Denver has a few things going for it that should help it bounce back. The city is a hub for alternative energy research, for example, and that’s made it a draw for government and the private sector.
The suburb of Golden is home to the National Renewable Energy Laboratory, the U.S. government’s key renewable energy and energy efficiency research center.
Vestas, a Danish wind-turbine maker, opened a manufacturing plant north of Denver last year and is building plants in Brighton and Pueblo.
Last month, REpower USA Corp., a unit of a German wind energy company, announced it would move its main U.S. offices to Denver from Portland, Ore.
Still to come is the development of ConocoPhillips’ alternative energy research and training facility in a 432-acre section of Louisville, about 22 miles northwest of Denver. The Houston-based energy giant bought the land early last year and has begun razing the site, which was previously owned by a subsidiary of SunMicrosystems.
Plans call for the development to be completed by 2012.
Rich McClintock, president of Westfield Development Co. in Denver, takes the long view on the market.
His company began construction last year on a 22-story, half-million square-foot office building in downtown Denver that is scheduled to open in April.
It’s off to a good start, with 78 percent of the space pre-leased, including 325,000 square feet set aside for utility giant Xcel Energy, McClintock said.
“The base rents around the city have fallen a bit since we started construction, but we’ve got a rather unique product and we’ll wait until next spring,” he said. “We haven’t found the panic button and we haven’t pushed it.”
