Energy sector demand cools

Business services take a large slice of the real estate pie downtown.

Technology, health care and business service companies are seeking more office space in downtown Denver, while demand from the energy sector is cooling, according to a report from CBRE Research.

Of the 2.8 million square feet being sought as of July, business services made up the largest slice of the commercial real estate pie, with 18 percent of all demand on a square-footage basis, followed by energy at 17 percent, health care at 11 percent, and financial services and legal each at 10 percent.

The CBRE data, released last week, shows the breakdown of all active tenants in the downtown Denver office market, defined as any tenant currently on the market for space, whether it’s because they are new to downtown, their current lease is expiring or they plan to expand.

“We’re seeing some increased diversity when we look at our wheel of office demand,” said Jessica Ostermick, director of research and analysis for CBRE. “That’s always great for a market to have so many different industries represented downtown.”

In July 2014, the energy sector made up nearly a third of all demand for downtown office space — 30 percent — followed by financial services with 14 percent and legal with 13 percent.

In terms of square footage, demand from energy companies has fallen by more than half over the course of a year, to 488,000 square feet from 1 million square feet in 2014, according to the report.

Gainers, on the other hand, were health care, which grew to 11 percent from 3 percent of all office demand; technology, up to 9 percent from 5 percent in 2014; and business services, up to 18 percent from 12 percent, according to the report.

“Most downtowns are going to see pretty consistent demand from your business services, your finance and your legal sectors, and that’s no different for Denver,” Ostermick said. “But health care and tech, those are some of the ones that we’re really seeing momentum and interest in being downtown.”

Overall demand for downtown office space, however, has fallen 16 percent year over year, which Ostermick said may indicate a softening in the market.

In July 2014, total demand was 3.4 million square feet, compared with 2.8 million square feet in July 2015. All told, downtown is home to 25.7 million square feet of office space.

“Anytime you lose over 500,000 square feet in active tenant square footage, you’re going to note an impact,” Ostermick said. “Overall, we’ve stayed really solid.”

The recent slowdown in Colorado’s oil and gas industry has also affected the amount of office available for sublease downtown.

Today, energy-related businesses account for 41 percent of space available for sublease, according to CBRE. In June, total sublease space downtown surpassed 1 million square feet, the highest it has been since at least 2006.

Anthony Albanese, a first vice president at CBRE and co-leader of CBRE’s North American Energy Facilities Group, said the increase in subleasing isn’t coming from distressed companies but rather large ones realigning their operations in response to falling oil prices.

“It hasn’t been every company putting space on the market — it’s just been regional headquarter shutdowns,” Albanese said.

Among the companies that have announced plans to close their Denver offices are Linn Energy, Newfield Exploration Co. and Pioneer Natural Resources, all of Texas.

WPX Energy of Tulsa also announced in March that it would consolidate a 120-employee Denver workforce with corporate headquarters in Oklahoma, leaving fewer than 15 jobs in Denver.

The subleasing activity has not impacted overall rental rates downtown, which has not been the case in some other oil and gas cities like Houston and Calgary, Albanese said.

The overall vacancy rate in the downtown Denver office market was 11.6 percent in the second quarter, almost flat from the first quarter’s 11.4 percent, according to CBRE. Asking lease rates were $33.23, up 39 cents from the first quarter and up $2.66 from a year ago.

“We continue to see positive absorption,” Albanese said.