Boulder blip: Sudden burst of sublease space hits downtown core

BOULDER — With considerable chunks of office space added to the Boulder market recently, it might be the right time for a new wave of high-tech entrepreneurs to consider moving to downtown Boulder.

“I think people will be able to take advantage and create some, should I say, ‘respectable’ deals over the next year,” said Stephen Tebo, chief executive of Tebo Properties and as experienced a hand as you can find in downtown Boulder properties. He cited the approximately 250,000 square feet of office space available for sublease as the No. 1 contributor to what may be a short-term soft market that has traditionally been drum tight.

Tebo’s concerns were mirrored by Jeff Wingert, a partner at W.W. Reynolds Cos., who noted that about 2 percent of all downtown office space is available through subleasing, which puts a kind of double hit — “whammy” perhaps is too strong a term — on leasing rates.

Among downtown spaces vacated, or soon to be:

SendGrid, a graduate of Boulder’s TechStars accelerator, is moving all of its Colorado employees to a downtown Denver site capable of accommodating 450 people. Those will include 60 employees from the Boulder headquarters, a 19,692-square-foot space at 1401 Walnut St.

Twitter, which entered the Boulder market with its 2014 acquisition of Gnip, is moving into 30,000 square feet in the Wencel Building at 1301 Walnut St. Twitter will vacate about 15,000 square feet at 1050 Walnut St. The expansion will enable the company to add 100 new employees.

SolidFire, which was acquired by NetApp last year for $870 million, is tripling its current space by moving to the PearlWest Building, the former site of the Boulder Daily Camera at 1048 Pearl St. SolidFire took 62,000 square feet in the new office and retail building and will consolidate its 250 local employees there who are scattered across three buildings — including the headquarters at 1600 Pearl St. — a few blocks to the east, as well as adding another 150 workers

Crestone Capital LLC has taken 13,000 square feet in PearlWest, vacating space at 1050 Walnut St.

The Wencel Building, a project developed and owned by W.W. Reynolds, adds another 63,000 square feet to downtown commercial properties, and together with PearlWest accounts for almost half of the total office space now available on the sublease market, with companies moving into those buildings from other locations. Wingert said both buildings are filling rapidly, but that still has left a bit of a hole in the market, even though both Twitter and SolidFire will be adding employees.

“Yes, there’s a net gain for absorption, but they are leaving behind smaller property space that come back on the market for less,” he said. “The (prior) tenants might be willing to let it go for lower rates, which is a significant hit on an already soft market.”

Typically, such properties sometimes fall into the shadow market — already paid for, but unlisted properties. Lynda Gibbons, president and managing broker at Gibbons-White Inc., said that shadow market may become a significant factor now, although real-estate agents usually are told about such availability in confidentiality by property managers.

However, Gibbons said that although the amount of square footage available in sublease and shadow markets might be somewhat significant today, it could be a quick transition to business as usual, especially in downtown Boulder.

“One tenant could come in and change things overnight,” Gibbons said. “Tenants have always wanted to be downtown, and we will see another wave of new companies.

“What really goes up and down (in Boulder) is the perimeter,” she said. “The core stays strong.”

Out on the perimeter, commercial property owner Lou DellaCava of LJD Enterprises said he isn’t seeing such effects, although the majority of his office space is outside of the downtown core. In fact, DellaCava said he is very optimistic about the 83,000 square feet of commercial property he will soon complete — an office project at 28th Street and Canyon Boulevard and a 40,000-square-foot office building at 30th and Iris streets.

“My tenancies have been stable at 100 percent for more than a year,” DellaCava said. “My tenants are not quibbling with me (about lease rates) or anything like that.”

There is always a bit of insecurity in the market, DellaCava said, because high-tech companies can grow or dissolve so quickly that they seldom make plans more than eight months in advance. On the other hand, downtown still can house these high-tech startups even as they grow, because they no longer require the manufacturing or lab space that high-tech companies needed 20 years ago.

Quite a bit of commercial space also has been added in the last four years, including some projects that might have been delayed during the recession, when no one could borrow money to build.

“There probably is an interruption in the growth rate (of Boulder companies), but I’m not as pessimistic as some,” DellaCava said. “Look at PearlWest. It took them seven years to build it, and it filled up in seven to nine months — and that was a spec building.”

New vacancies downtown don’t even count large spaces at 26th and Pearl streets currently occupied by Google Inc., which is building a new 300,000-square-foot campus at 30th and Pearl streets. It’s not yet known whether Google will keep its current locations when the new buildings are completed.

Becky Callan Gamble, president of Dean Callan & Co. Inc., said that, on paper, the Boulder market remains tight, with a vacancy rate of about 5 percent, but that is due mainly to what factors are considered in “official” market analyses.

The market is slow right now, generally speaking, but there isn’t a lot of availability, so that’s hard to gauge, she said. If you were just looking at the Boulder vacancies, the rates are very healthy; but less so if you start to factor in the subleases, and that’s starting to build.

“We are just beginning to see how it will it impact the leasing market, and I think it’s something that we will just have to watch during the rest of this year and see how it goes.”

Gamble said that a variety of circumstances could be affecting the market today, ranging from vacationing chief executives to the incredible uncertainty surrounding this year’s presidential election. Certainly, it is not often that commercial vacancy rates — or any vacancy rates, for that matter — come into question in Boulder.

Wingert said it’s typical that new office space will fill more quickly that older buildings — as it can be more readily modified for the tenant. While he said the Wencel building is half full, and potential tenants are already looking at the other half, that still leaves the smaller, older office space out there to complicate lease rates.

“Oh, well,” Wingert said. “It’s been going gangbusters for four years. It had to slow down sometime.”

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