One of the primary factors that has had the greatest impact on the office market is vacancy (demand). According to statistics published by the CoStar Office Market Report (first quarter 2007), the overall office market vacancy rate declined to 13.4 percent in first quarter 2007, as compared with 14.5 percent in first quarter 2006. This indicates a downward percentage change of approximately 8.2 percent for this one-year period.

Total office market vacancy rates for the Denver metro area were at five-year highs between 2002 and 2004, fluctuating between 16.9 percent in 2003 and 16.4 percent in 2004. In 2002, vacancy rates dramatically increased to 16.5 percent as compared with 13 percent in 2001. The decline of vacancy rates from the five-year high in 2003 (16.9 percent) to first quarter 2007 (13.4 percent), indicates an impressive downward percentage change of approximately 26.12 percent.

As of first-quarter 2007, 11 of the 31 Denver metro submarkets as reported by CoStar indicated total office vacancy rates (all classes) below 10 percent. The Platte River submarket had the best performance, reporting a vacancy rate of 3.2 percent. Only two submarkets reported total office vacancy rates above 20 percent, with the worst performance of 34.9 percent vacancy being reported by the Boulder County submarket.

The decline in vacancy rates and increase in demand has led to an overall increase in quoted rental rates. In 2001, quoted rental rates were at a high of $20.54 per square foot on a full service basis. As vacancy increased in 2002, 2003 and 2004, quoted rental rates decreased to a five-year low of $16.52 per sf on a full-service basis. This represented a decline of approximately 24 percent. From third-quarter 2004 to first-quarter 2007, quoted rental rates have increased from $16.52 to $19.48 per sf on a full-service basis. This change in quoted rental rates represents an increase of approximately 18 percent. Although rental rates have not fully recovered to the 2001 high, they are close and continue to improve.

As of first-quarter 2007, 11 of the 31 Denver metro submarkets reported total quoted office rental rates above $201 per sf full-service, with the highest quoted rental rate of $27.50 per sf being reported by the LoDo submarket. The lowest quoted rental rate of $14.36 per sf is reported by the Aurora submarket.

The decrease in vacancy rates and increase in rental rates has led to the financial feasibility of limited new office construction in the high performance submarkets throughout the Denver metro area. Currently, just under 2.4 million sf of office product is under construction in 20 of the 31 submarkets. The LoDo submarket has reported the most under- construction activity at 495,402 sf. The LoDo market also reported the highest quoted rental rates at $27.50 per sf on a full-service basis and one of the lowest vacancy rates at 8.8 percent.

In addition, office product deliveries had declined from 7.8 million sf in 2001, to a five-year low of 1.3 million sf in 2005. However, office product delivery had increased to 1.9 million sf in 2006, and nearly 2.4 million sf is under construction, with an additional 383,004 sf already delivered as of first quarter 2007.

Due to the dramatic changes in market conditions in 2002 and 2003, it would have been difficult to predict a speedy recovery for the Denver metro office market. However, the primary market drivers continue to show an overall strengthening and expansion in the office market. If construction costs remain at current levels, vacancy rates continue to decline and rental rates continue to increase, financial feasibility and new construction in the office market is likely.