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Guidance Corporate Realty Advisors

COMMERCIAL TENANT AND BUYER REPRESENTATION

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Denver Office “Shadow Space” is Lurking!

COMMERIAL TENANT'S & BUYER'S BULLETIN
 
April 24, 2009 – The Colorado Department of Labor recently reported that Colorado’s unemployment rate had jumped to 7.5% in March, 2009, a 22-year high, as lay-offs continued and, in fact, accelerated!  Many of these job losses occurred in the manufacturing and construction sectors.  However, the jobs category that includes “professional and business services” shed 1,700 jobs in March, 2009 and has shed 25,000 jobs in the last 12 months.  These unemployment figures do not include those who have given up looking for work or those who have settled for part-time or temporary work.  If one includes these “under-employed” workers, the actual overall Colorado unemployment rate is now above 13%! 
 
                    My question:  How much vacant office space has been created by these job losses? 
 
Using an average ratio of 180 RSF (rentable square feet) of office space that utilized per employee, the 25,000 professional and business services jobs lost in the last twelve months indicates that companies should need approximately 4.5 million RSF less office space than they did a year ago.  Yet, official statistics indicate that the Denver metro area had a “negative office space absorption”, or loss of occupied office space, of only 1.3 Million RSF in the same period. 
 
Where is the extra 3.2 Million RSF of lost office space – an amount  roughly equivalent to half of the entire office space inventory in the Interlocken submarket?  The answer:  This empty office space is lurking as “Shadow Space” – essentially empty office space that has yet to hit the Colorado commercial real estate market.
 
Why would a company that doesn’t need expensive office space not let go of this space?  There are numerous reasons.  As one example, if a company leasing a large block of space – say an entire floor – sheds 15% of its work force, it may find itself with empty desks scattered across its entire floor.  To sublease its excess space, it will need to reorganize and consolidate its operations and then build a demising wall to separate the now empty space from its occupied space.  This costs money, and if the remaining lease term is relatively short – say less than 18 months – the costs and headaches may not be offset by the potential savings.  In general, if the remaining lease term is one year or less many Tenants may just ride things out.
 
Other companies may decide to hang onto their excess space, because management believes that things will soon improve and they will be hiring again. Other companies may feel that shedding space may send the wrong message to customers and/or employees.   The reasons are varied, but if the economy continues to under perform this space will start coming back into the market as sublease space – significantly impacting the commercial real estate market in Denver.  Large blocks of sublease space act to drive up the overall office vacancy rates and act to depress overall office lease rates, because the sublease space can often be leased for significantly less than “direct space” offered by Landlords.  This is bad news for Landlords and for Tenants trying to shed space, but great news for Tenants looking to lease space!
 
So, if you’re an office Tenant looking for deals, don’t be afraid of the shadows, because Shadow Space means that good times could be ahead!
 

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Guidance Corporate Realty Advisors provides Corporate Tenant / Buyer Representation services to corporate real estate users in the Denver metropolitan area including Boulder, Colorado.  Guidance also provides these services in all major U. S. markets, as well as markets in Canada, Asia, South and Central America, and Europe.  To contact: (303) 442-5400 ext 2; Email for Information; 521 Valley View Drive, Boulder, CO 80304; 5231 Monroe Street, Suite 200, Denver, CO 80216.

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