Sublease space soars across the region

A previous version of this story identified Beau Gamble as a broker for Gibbons White. He is actually a broker for Dean Callan & Co.

The amount of available office and industrial square footage more than doubled in some of the region’s markets in 2020 as the pandemic restricted in-person business, but local real estate watchers say that isn’t a sign of an impending collapse of long-term demand.

Plenty of office space

Work-from-home during the pandemic led to a lot of empty offices, and a lot of company leaders looking to get those rent obligations off their budgets as COVID spread through Colorado and the world.

In December 2019, the Boulder area had 180,519 square feet of office space for sublease. Six months later, that figure rose to 254,908 square feet, and it hit 366,343 square feet in December 2020, according to data provided by CBRE’s Denver office and CoStar.

The Northern Colorado market saw its available sublet office space spike 211% from 90,991 square feet at the end of 2019 to 283,196 in the final month of 2020.

The Northwest Denver market spanning east Boulder County, Westminster, Broomfield and Arvada bucked the trend in the first half of the year, with just more than 38,000 square feet coming off the sublet market from the 169,988 that was available in December 2019. However, that figure rose to sit at 213,661 square feet at the end of 2020.

But while the overall amount of space is up, the source of all that new space isn’t from struggling companies looking to move expenses off their books.

Ron Kuehl, a broker at Fort Collins-based Realtec, said a large portion of that increased floor space is due to some major office tenants leaving. Some of these include Comcast Corp. (Nasdaq: CMCA) and State Farm, which vacated their call centers in Fort Collins and Greeley, respectively, to fully operate from home. Comcast made that move well before the pandemic began.

The majority of office deals occuring in Northern Colorado are below 15,000 square feet, he said, and he doesn’t believe the pandemic has made that market weaker. While the amount of space for sublease will remain high, he attributes that to the rarity of such large spaces trading hands and because allowing a renter to subdivide its block of space to smaller companies doesn’t make sense from the perspective of the landlord.

In Boulder, the market is slightly different. Beau Gamble, a broker at Dean Callan & Co., said that the added sublease space in the area is due to a mix of smaller technology companies following the lead of larger players like Google and Twitter Inc. (Nasdaq: TWTR) by sending employees home, and many are subletting to get larger or smaller spaces depending on how much space they’ll need in a post-pandemic return to the office.

“We’re seeing 20,000 or 10,000 square foot tenants put their space on the market for sublease, backfill it with a tenant or two and then go out and try to sublease something smaller,” he said.

The other portion of added office space is from companies that have been hammered by stay-at-home orders and need to reduce overhead.

Industrial sublets rise at slower pace

Industrial properties for sublease also hit the market in 2020 but not nearly at the rate of offices.

The size of the Boulder industrial sublet market rose 37.4% in the year to 244,815 square feet, while the Northwest Denver area rose at a similar rate of 36.4% to close the year with 62,379 square feet open.

Northern Colorado’s available industrial space spiked 82% to 82,542 square feet, according to available data.

Kuehl attributed a fair portion of that to the energy industry and oilfield services companies, saying that the state regulatory environment is making oil and gas operators less willing to do business in Colorado, even in the oil-friendly Weld County.

The industry writ-large went through a round of deep cuts and cash conservation last year after the pandemic cratered demand and prices.

Landlords shouldn’t worry too much if their tenants aim for a sublease outside of the oil and gas industry and are relatively non-isolated, Kuehl said, but owners whose buildings aren’t as well-located may need to take a more active role in finding a subleaser if their tenants are flagging.

“These were properties that the gas industry was leasing up everything they could a few years ago, and some of these properties are not in the right location,” he said. “…And if you can’t find an oil and gas company tenant replacement, it’s going to be a very difficult time for industrial landlords.”

Flex inventory whipsaws

The availability of flex space in the local sublease market went for a ride in the past 12 months, with initial spikes in the first half of the year calming down in the latter half.

The Boulder area started with 74,444 square feet of flex space before rising to 123,364 square feet in June. That figure retreated to 77,087 square feet of space at the end of 2020.

The Northwest area started with just more than 5,000 square feet of available space before rising to 16,422 square feet at the halfway point of the year and falling to 14,554, while Northern Colorado started with a tight 2,251 square feet before exploding 1,562% to 37,552 square feet of available space in June and falling to 8,915 square feet in December.

Gamble said the added square footage mid-way through the year is being taken up aggressively by e-commerce companies looking for storage and distribution space.

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