In addition to normal real estate considerations--location, monthly rent, lease terms, services--businesses seeking to rent office space in Denver these days have a host of other decisions to make: Decisions like what color the free car should be and where to take the prepaid vacation.
Free cars? Paid vacations?
At the moment, these and other lavish gifts and inducements--including free rent--are playing a major role in the Denver office market, where two years of extensive construction followed by a business slowdown have turned what was one of the nation's tightest office-space markets into a tenants' heaven.
"People were offering free cars, there was somebody giving away a trip to France, there were ski vacations," recalls Dave Warner, of Capitol Colorado Mortage Co., which moved to new offices here last year.
When Willard Owens Associates, a geological consulting firm, sought 3,000 square feet in downtown Denver recently, the firm decided it wouldn't even consider a building that didn't offer at least six months' free rent. No problem--the company finally signed a lease at a prominent center-city address that waives rent payments for the first 10 months of the term.
Other business tenants here report similar experiences in the past six to 12 months as developers have come to realize that this city cannot possibly absorb all the new office space that was built in response to the now-deflated energy boom.
Tenants in the market for two-office suites are receiving proposals similar to those that used to come only to companies looking for two full floors. The offers have included, in addition to gifts and free rent periods, generous tenant alteration allowances, and "no-bump" (no rent increase) leases up to 10 years in length.
There is some disagreement about the actual dimensions of the office supply situation. Various experts have come up with markedly different estimates of total office space, and vacancy rates in the Denver metropolitan area.
A study last year by the Fuller & Co. real estate firm found an overall vacancy rate of 19.5 percent, which would rank Denver with Washington, near the top of national vacancy ratings. The Office Network, a Houston-based organization of business real estate concerns reported the Denver vacancy rate at 15.8 percent in mid-1982; the network said the national average then was 7.5 percent. In contrast, last year's reports from Los Angeles-based Coldwell Banker found Denver's vacancy rate below levels in most other cities.
But all of the studies seem to reflect the same trend. Denver's office-space market has gone from extremely tight to wide open in just two years. Chicago-based Howard Ecker Co. reported a vacancy rate of zero in downtown Denver in 1980; in 1982, Ecker reported a 5 percent rate. In the suburbs, where sprawling office parks ring the southern and eastern rims of the city, Ecker found a 1 percent vacancy rate in 1980 and 18 percent in 1982.
Disturbed by the conflicting studies and by media reports that Denver is overbuilt, the Chamber of Commerce here undertook a study of its own. The Chamber's report, issued this month, says the existing pool of office space is so deep that even if no new buildings are begun for three years and rentals continue at boom-era rates, there will be excess space on the market until 1986.
If the rental business settles back to normal rates, as now seems likely, Denver's office space glut will last until 1987, the Chamber said.
This situation is the cumulative result of many bad guesses by many developers. Convinced that Denver would be the capital of an energy-related economic boom, investors around the country--as well as Mexican and Canadian firms--began an orgy of building here about three years ago.
The Fuller & Co. study says there were about 31 million square feet of space here in 1980. Another 4.4 million square feet were added in 1981, when the annual "absorption rate" was roughly 3.5 million square feet.
With the energy boom, absorption of new offices went up to about 4.5 million square feet annually. But builders opened 11.5 million square feet of new offices last year, according to the Chamber of Commerce. This year, while the boom has gone flat, another 11.3 million square feet are under construction.
The result has been neither an artistic nor a financial success. Denverites were furious last year when The New York Times' architecture critic compared this city to Houston. But the point is well taken. The central business district today is a forest of look-alike towers so close together that most tenants have no view of the glorious mountain range just west of town.
The oversupply has put financial pressure not only on new developers but also on landlords who have been here for awhile. Last year, Prudential Plaza, a Saarinen-like structure completed in 1972, lost its anchor tenant, Mobil Oil Corp., which found a better deal elsewhere. The departure of Mobil and service firms that need to be near the oil giant left 300,000 square feet--half the building--vacant. And Prudential must now compete with all the new vacant building for tenants.
The extensive building has also crimped the sublease market. Northern Coal Co. learned that last year. After having signed a 10-year lease on three stories of office space for occupancy in February of 1982, Northern saw its business drop so sharply that it cut its work force from 50 to five.
The firm no longer needed its new office space but ended up paying monthly rent of $185,000 for about half a year while trying to sublease the vacant space.
For all that, however, the general mood in Denver's business and real estate community is still optimistic. The central theory here is that the current energy downturn is a temporary phenomenon and that Denver has to snap back.
That attitude is reflected in the announcement two weeks ago of a billion-dollar-plus development in the heart of the city. The proposed project will include a giant convention center, a 1,000-room hotel--and more office space.