Q1 2023
Office Sector Adjusting to New Realities
The dynamics of supply and demand in the office sector are gaining clarity as markets adjust to the impact of the pandemic and the resulting trend in remote work. A hybrid workplace model has become the predominant arrangement in many organizations, where employees split their time between remote and in-office locations. As office tenants have adopted a hybrid model, this has resulted in lower overall utilization of space and tenants do not need as much square footage as they did prior to 2020.

The resulting landscape has shifted to the tune of more than 400 million square feet of “missing” demand for office space based on expected leasing activity had historical trends prevailed. The amount of office space leased in Q4 2022 was 14.4% lower than Q3 2022, and 20.3% lower than Q4 2021. The number of leases signed was the lowest since the third quarter of 2021. The annual volume of office square footage signed in 2022 was 23.6% lower than 2019.
Office tenants are now focused on occupying newly constructed, high-quality space, as they vacate older, less functioning buildings. The newest and highest-quality office properties are expected to perform the best in the year ahead. Businesses are more likely to consolidate into their most strategic locations which tend to be centrally located and of higher quality. The shift to quality is most likely driven by tenant preferences for flexibility and the desire to attract and retain talent. Vacancies for office space built in the 2010s continued to fall over the past decade to a low of roughly 7% in Q3 2022, while vacancies in older buildings have continued to rise. Properties constructed in the 1990s and earlier, have vacancies above both the national average and their level from 10 years ago. Older offices that lack amenities and health-and-safety features are at heightened risk of obsolescence.

The national office market absorbed 6.6 million square feet during Q2 and Q3 2022, but the vacancy rate continued to climb to 17.1%, the highest level since the third quarter of 1993, according to the NAIOP’s “Office Space Demand Forecast”. Completion of new office space has outpaced absorption as tenants and investors are drawn to new, high-quality office buildings. Multi-tenant office buildings of 25,000 square feet or higher have posted 37.3 million square feet of net absorption in the past 12 months, according to CoStar data, whereas similar buildings constructed prior to 2018 have seen vacated space grow by 51.5 million square feet in that same period.

Sources: CoStar News
Fort Collins/Loveland/
Larimer County

The Larimer County sub-market is comprised of 12.1 million square feet of office space, only up 0.6% from Q1 2022. Currently, there is over 1 million square feet of available space, of that 360,000 square feet is sublease space. The vacancy rate is 5.4%, up 0.1% from Q4 2022. Occupancy rates continued to declined over 2022 and as of Q1 2023, occupancy sits at 94.6%. 12-month net absorption was only 59,700 square feet, down from 237,000 square feet in the prior period, a 74.8% decrease. For the last three quarters, there has been no office space under construction, with constructions starts in Q1/Q2 2022 totaling 16,000 square feet. A stark contrast to 2020 when there was over 166,000 square feet of construction starts in the sub-market. In 2022, there was 230 lease transactions completed; of that only seven leases were over 10,000 square feet and only 7.4% of leases completed were over 5,000 square feet.

Market rent growth is expected to decline over 2023; annual market rents only grew by 2.9% from Q1 2022. Current market rents sit at $24.66 per square foot. Market sale price per square foot increased by 2.8% from the prior period, to $194, an all time high for the sub-market. Market cap rates are at 8.3% and are anticipated to increase over 2023. Condo sales during 2022, sold at a cap rate 2% lower than individual property sales, 4.4% and 6.3% respectively. The total office sales volume for 2022 was $84.4 million.

Sources: CoStar
Greeley/Weld County

The Weld County sub-market is made up of 5.9 million square feet of office space. There is 749,000 square feet available, of that 321,000 square feet is sublease space. The current vacancy rate is 7.3% or 432,000 square feet, up from 6.8% in Q4 2022. Occupancy rates are declining, with 92.7% of space occupied as of Q1 2023. 12-month net absorption was negative 35,600 square feet, down 688.5% from one year ago. As of Q1 2023, there is only 5,100 square feet under construction, down 53% from the prior period. There were only 59 lease transactions completed in 2022, totaling 83,900 square feet. Only four of the transactions were over 5,000 square feet.

Market rent growth continued to decline over 2022, with a growth of only 3% from Q1 2022. Market rent per square foot is currently $21.57, up from $20.98 from the prior period. Market sale price per square foot increased 4.1% over the past year and sits at $189, an all-time high for the Weld County sub-market, similar to the Larimer County sub-market. Market cap rates remained unchanged from the prior period at 8.6%. Office sales volume totaled $35 million for 2022, with Q3 2022 making up 41.5% of total sales.

Sources: CoStar
Economic Uncertainty Will Continue to Impact Office Sector

Any increase in a key measure of office demand in 2023 isn’t likely to occur and the difference in between tenant move-ins and move-outs of leased space could continue to slow into 2024 as net absorption is hampered by economic uncertainty. This economic uncertainly is impacting decisions around space needs, and leasing activity has been increasingly dominated by smaller space requirements. Just 10% of office leases signed in 2022 were for 100,000 square feet or more, down from nearly 19% on average from 2017-2019. Given these trends and concerns about a potential recession in 2023, net office absorption is forecasted to slow by 8.1 million square feet for the entire year. Moving forward, it's projected that absorption in the first three quarter of 2023 will total 13.3 million square feet. A full return from remote work seems unlikely, but the office market will continue to adapt and evolve as new work patterns are established and the economy stabilizes.

Source: CoStar News
Realtec Wins Big at NCCAR Titan Awards
Realtec Titan Winners
The Northern Colorado Commercial Association of Realtors (NCCAR) held their Annual Titan Awards in February, which honors brokers in commercial real estate. Realtec Founder and Partner, Steve Stansfield, won the NCCAR Legacy Award for his achievements and contributions to the commercial real estate industry over the past 45 years. Stansfield founded Realtec in 1989, which was one of the first brokerage houses in Northern Colorado that strictly focused on commercial real estate and its singular focus allowed it to achieve a dominate presence in the region.

Ron Kuehl, Larry Melton and Jamie Globelnik of Realtec Loveland were awarded Deal of the Year for successfully completing the sale of a 152-acre site to Amazon in Loveland, Colorado. The new Amazon fulfillment center is well underway to completion and will be 3.87 million square feet, which will be the second largest Amazon facility in the U.S. This recognition is an honor to Realtec and the associates who worked hard to bring this transaction to fruition. Last year was a great year in real estate and there will be many opportunities for investors, landlords and tenants in 2023.
Realtec is here to help navigate the changing market
CoStar Market Reports - Larimer and Weld County
Q1 2023
This quarterly publication is authored by Jamie Globelnik of Realtec Loveland