Denver’s vacant office space is piling up, but don’t blame coronavirus and work-from-home trends

Facebook’s office in Denver is still empty and, likely, will remain so for months to come as the approximately 100 employees and contractors are allowed to work remotely through the end of the year.

But the company doesn’t plan to give up one square inch of its space at 1900 16th St. In fact, Facebook is doubling its square footage and plans to make Denver one of three new hubs nationwide to attract more workers even if they do not work on site.

“We’ll begin offering remote work opportunities on July 1, and in the next five to 10 years, half of our people company-wide could be remote,” said Chloe Meyere, a spokeswoman for Facebook, which employs 48,268 people. “We’re evaluating Denver as one of our remote work hubs, but we will continue to grow and expect many people to work out of our offices around the world, including in Denver. As Mark (Zuckerberg) said in his remarks, ‘We’re committed to keeping our offices, and making them great, too.’”

As companies approach the easing of coronavirus safety restrictions, the unintentional work-from-home experiment has folks reevaluating the future of the office. The financial impact of the pandemic has taken a devastating toll and some companies have already called it quits on their leases. And in downtown Denver, there are other ongoing economic trends changing the mix of office space in the city, as consolidation in the oil and gas industry has added to a growing glut of subleases.

After months of video calls, instant messaging and infrequent travel, employees and companies support a hybrid approach that includes some form of work-from-home in the future. But what won’t be going away anytime soon: The actual office.

“It’s wonderful that we are able to work remotely without a lot of disruption to the nuts and bolts of the legal services we provide,” said Dan Fredrickson, a partner at business law firm KO in Denver and Boulder. “But also there’s a lot about a job that’s not that. It’s being able to see your colleagues and coworkers, to see your clients and engage on a more personal level. I think folks are missing that.”

Frannie Matthews, CEO of the Colorado Technology Association, is a big proponent of working from home. She did so for 18 years while at IBM. A survey her organization conducted last month found that only 9% of the companies expected employees to return to work operating at the same pre-COVID-19 levels (76% believed work-from-home will become more common). 

But remote work has its drawbacks, she admitted.

“We’re still working from home,” she said. “But as soon as we were able to, we started meeting in parks once a week for lunch. Everybody brought their own lunch. We socially distanced and abided by the recommendations of the governor’s order. And that made a big difference. Our team wanted to sit in a circle and see each other in 3D.”

Working from home in the time of COVID was not the same experience. Many people have roommates or a spouse using broadband and making Zoom calls. Quite a number had children stuck at home trying to go to school online. There were toilet paper distractions.

“I would say that it’s very hard to ideate with the group virtually. It’s hard to stay focused on creativity. I think also people are fatigued from Zoom,” Matthews said. “Most people that I talked to are thrilled to not have to commute. They’re feeling better about their impact on the environment. And they’re feeling better about not wasting that time. But, you know, this is complex. Humans want to be together.”

Coming soon: 2.6 million square feet for lease

As offices in Denver shut down in March to nonessential workers, some long-term tenants began shedding space they no longer needed. 

At the end of May, commercial real estate firm CBRE, which tracks office vacancy and lease rates, saw the city’s available subleases grow to 1.5 million square feet. That was up 15% from April and was 65% higher than second quarter 2019. 

By this time next year, another 1.1 million square feet in speculative office space should be completed and ready for new tenants. That’s 2.6 million in available office space, or nearly 10% of the existing downtown office market.

“What’s important here is there was a significant amount of sublease space that hit the market in May,” explained Anthony Albanese, senior vice president with CBRE who specializes in the downtown Denver office market. “They’re a leading indicator that a market has kind of peaked and is now going into a decline phase in terms of asking rental rates.”

Don’t blame coronavirus disruptions entirely for the weakening office market, though. It’s more like the pandemic accelerated a growing weakness. The bulk of subleases come from the oil and gas industry, which saw employment peak in 2014 before oil prices dropped. Consolidation began and companies have been giving up downtown space for years. 

Another contributor is coworking spaces, which introduced the simple concept of month-to-month leases that are also easy to cancel. While COVID was directly blamed for the Charley Co. and The Riveter coworking spaces calling it quits earlier this month, industry troubles are centered on Denver’s largest landlord, coworking giant WeWork, which revealed its shockingly poor financial situation in August. 

About half of Denver’s coworking market is owned by WeWork, which has nine locations in Denver totaling 570,000 square feet, plus a 30,000-square-foot office space in Boulder.

Sarajane Goodfellow, who works for real-estate investment firm Unico, said for years, subleases were snapped up by technology companies so the increase wasn’t as noticeable. 

But if activity stops — and she describes COVID’s impact as “a pause button” — she’ll feel the pain because she represents landlords and building owners. She’s competing with lower-priced subleases that dangle aggressively low rents since the original tenant is desperate to cover the loss.

“Sublease is an obvious threat,” Goodfellow said. “There’s absolutely more sublease space, coming online every week. There’s no denying it. And I think the biggest threat to sublease spaces is that it just gives tenants a more cost-friendly option so it’s harder for owners like Unico to stick to their guns on what these terms are.”

Of course, from a tenant’s viewpoint, that’s good news. Downtown Denver’s rental rates were around $35 per square foot at the end of the first quarter, near the high of $36.66 reached in September. And that’s a reason why Albanese still feels positive about the Denver office market.

“Most of our clients are expecting a better economic situation on their office leases than pre-COVID, so it’ll be more affordable,” he said.

But another reason is that the higher rents combined with the region’s low unemployment rates had kept some out-of-state companies from taking the leap and expanding or moving to Denver.

“I think it actually works out well,” Albanese said. “There have been a lot of major corporations circling Denver because of the amount of talent and labor pools that we have here.”

In a weird way, higher unemployment should attract the companies that were waffling over Colorado’s record low 2.5% unemployment rate in December. At that low rate, it’s difficult for companies to hire enough workers, let alone find highly qualified ones.  

“There’s an expectation that some larger employers may refocus on Denver from the coasts to tap into that now slightly-loosened labor pool of highly educated folks that live here and are able to come into town as the employer of choice,” Albanese said. “There’s been some recent rumors about some very well-known social media companies looking at Denver.”

He’s talking about Facebook, which declined to spill more details about its Denver expansion. But the company did confirm that Denver would join Atlanta and Dallas as new tech hubs that the social-media company will use to expand its staff. The company also recently doubled its office space by another 23,000 square feet in downtown Denver, as reported by BusinessDen in April.

“And when I say new hubs, these aren’t necessarily offices,” Facebook CEO Mark Zuckerberg said during a livestream on May 21. “Over time, we will likely create some kind of physical space for the community to come together there but the idea for these hubs is that we want to create some scale. So we want to focus the recruiting energy in some cities where we can get to hundreds of engineers.”

Goodfellow, who works at Unico, doesn’t want to predict how the office will change. But she’s pretty confident that the Denver office market will recover from coronavirus disruptions, find the balance between new construction and subleases and absorb other economic impacts weakening the current market. 

“Denver is still going to attract the talent that we all talk about and I think our unemployment will start to level itself out and the markets that were hot before are going to come back,” she said. “I just think everyone’s sitting on the sidelines waiting to see when.”