Empty offices abound

Erin Johansen Business Journal Staff Reporter

From the December 14, 2001 print edition

Twenty-five office buildings in metro Denver are empty and brokers are trying to fill at least half the space in 30 more buildings because of vacant space, subleases or large leases expiring in the next year or two.

The vacancies are pushing rents lower, and many landlords are being forced to aggressively market their buildings to potential tenants. Just a year ago, it was a landlord's market.

Rents downtown, for example, have dropped by $1 to $2 per square foot, according to a third-quarter report issued by Jones Lang LaSalle IP Inc. A new building in the southeast suburban market was recently offering rents at $5 less than what was projected in the developer's pro forma.

The leasing data, compiled by CoStar Group, includes "flex" and office space in buildings of all ages and sizes in the southeast suburban, downtown and northwest commercial markets.

CoStar tracks commercial real estate data nationwide, based on information provided by building owners and managers.

According to the CoStar data, compiled by local tenant representation firm Fairbairn Commercial Inc., 12 of these vacant buildings are in the southeast suburban market; three are brand new office buildings. Four are existing office buildings and five are new or existing flex buildings.

Flex space can be used as office or open warehouse space -- or both. Often one-story flex buildings gained popularity among many high-tech companies because of their wide open areas, flexible space and low rents relative to traditional office buildings.

Five flex buildings totaling more than 280,000 square feet in the Inverness area near Centennial Airport are vacant.

"I believe flex space is a huge competitor to office space," said John Fairbairn, president of Fairbairn Commercial. "It comes down to [a company's] square-foot-per-employee cost. [Companies] can cut their occupancy costs substantially by going into those products."

During 2000 and 2001, many developers built flex space because it was quicker and cheaper to build than large office buildings.

At Cushman & Wakefield of Colorado Inc.'s annual year-end review and forecast, broker Rich Hubina said the vacancy rate for flex space through the third quarter of this year was 8.8 percent. Last year, it averaged 6.9 percent.

According to CoStar, the three empty new office buildings in the southeast market are Vista at 9201 E. Dry Creek Road in Englewood, Dry Creek Corporate Center Two at 10700 E. Geddes Ave. in Englewood and Lincoln Office Center at Inverness.

Vista, which is just over 128,000 square feet, was originally built by TeleTech Holdings Inc., but before moving into that building, TeleTech bought an existing building -- vacated by AT&T Broadband -- and put Vista on the market. The building, which has no interior finish, recently sold to national investment adviser RREEF for about $94 per square foot.

By comparison, 4600 S. Syracuse, a new "class A" office building in the Denver Tech Center developed by Hines Interests LP, sold earlier this year for about $200 per square foot.

Engineering and construction service company Stone & Webster Inc., now located on the I-25 corridor, reportedly is considering leasing the entire building from RREEF.

Dry Creek Corporate Center was developed by CarrAmerica Realty Corp., as speculative multi-tenant office space. Construction of the 93,773-square-foot office building is in the final stages, said Bill Krokowski, managing director of CarrAmerica's Denver office.

Lincoln Office Center at Inverness, which is 58,800 square feet, was developed as speculative office space by Lincoln Property Co. Inc.

Most of the other vacant or underleased buildings are new or are victims of the downturn in the high-tech and telecom industries. For example, Lucent Technologies, Liberty Media Corp., U S West and Rhythms NetConnections have all left space in the southeast market, either because they moved or downsized.

Downtown Denver -- the healthiest office market in the metro area-- has no completely empty buildings.

One building, 1616 Glenarm Place, is 8 percent leased, according to CoStar, because it's under renovation and will not open until next year.

About 80 percent of 98,572-square-foot Lawrence Court, at 1475 Lawrence Court, is available for lease -- but not vacant. According to Keith Neff of Lowe Enterprises Colorado Inc., which owns the building, 75,000 square feet of that space is leased to Qwest Communications International Inc. and Qwest has said it's willing to work with the landlord to sublease the space.

By comparison, there are 14 empty buildings in the northwest office and flex market. These include 10 newly constructed office buildings, an office building built in 1999, two new flex buildings and one existing flex building.

"All space in that market is suffering right now, it doesn't matter what type," said Ken Gooden, a tenant representation broker with Staubach, formerly known as The Staubach Co.

The new office buildings include three developed by Legacy Partners Commercial Inc. in an area known as Mountain View Corporate Center. Some of the space in a fourth building in that development is leased to 360 Networks, which filed for Chapter 11 bankruptcy protection this summer.

The development -- along with others in that submarket -- has suffered because of the high tech and telecom fallout. For example, 360 Networks was to lease an entire building, completed in October. As part of the company's bankruptcy workout, Legacy has gained possession of the building, said Peter Llorente, regional vice president for Legacy Partners.

Because 360 Networks did not need or move into the building, the structure is still in "shell" condition, he said.

The telecom company is now leasing some space in building two, but plans to move to building three, in part because another telecom company, XO Communications, built an extensive infrastructure in that building that 360 Networks can take over. XO has since vacated the building.

"They needed some technological infrastructure and XO had built that all in there," Llorente said. "It's plug and play."

Of the 360 Networks bankruptcy filing, Llorente said: "We're working with the tenant. Whether we like it or not, we're part of the process so we should come up with something that's good for the tenant too."

Several other speculative office buildings in the northwest corridor are vacant including three built by Etkin Johnson Group LLC.

These buildings total more than 280,000 square feet and were all built during the past year, according to the CoStar data.

"We're getting more activity," said Barbara Myers, a vice president with Etkin Johnson who's in charge of leasing those buildings.

Llorente said he's keeping the tough market in perspective.

"There's a far different landlord profile than there was in the '80s," he said. "They're larger and institutional. While we're not experiencing the best of times right now, we just came out of a great time."