At a moment when the waning pandemic might have given hope that workers would head back to the office, new commercial real estate data shows office vacancies continue to rise in Denver.

That’s for both the central business district downtown and along the southeast I-25 corridor including the Denver Tech Center, according to new quarterly reports by commercial real estate giant CBRE.

The downtown office-space market lost some 73,000 square feet of leases over the third quarter, pushing vacancies to 27% of existing space. The market shed another 169,700 square feet in southeast market, where vacancies rose by almost 20% over the last quarter, according to the report.

Those numbers run counter to a positive trend in Denver suburban retail space leasing, where more space was leased than vacated for a sixth consecutive quarter, according to CBRE.

Businesses snapping up available retail space was particularly strong in Cherry Creek and along Colorado Boulevard, as well as the northwest metro area. Report authors noted some of that demand may be the result of the weaker retail space market in downtown, as workers continue opt for shopping alternatives closer to home.

“Businesses that allow their employees to work remote, partially-in-person or an alternating schedule, don’t need to spend the money for large Class A offices,” Peter Katz, a property manager with Trybe, said.

Trybe is a downtown firm of investors and property managers with holdings here and in the Midwest.

Katz, who doesn’t expect that trend to turn around anytime soon, said he routinely sees 3,000-foot offices occupied at any given time by a couple of employees, and larger leases where entire floors lie vacant.

“I don’t know if we ever go back to everyone being in the office,” Katz said. “COVID really pushed all of us to adapt.”

In the downtown market, Class A office spaces — those that are recently built with new amenities — showed a modest uptick of leasing activity, according to CBRE.

Brokers call that a “flight to quality” as employers try to lure workers back with new space and as many amenities as possible.

But Class B spaces, ones where offices are well-maintained but dated, showed a sizable drop in occupancy.

It was the tenth successive quarter, 2.5 years, of Class B vacancies downtown growing.

Empty offices are most glaring in downtown’s central business district, where some 40% of Class A space and 30% of Class B space shows as vacant, according to CBRE.

In Lower Downtown (LoDo), where employers and their workers find trendier dining and more redevelopment attractions, occupancy has fared better – around 13% Class A vacancies and 16% Class B vacancies, according to the report.

Managers said the modest strength in Class A leasing is something to be expected in a struggling market. That’s when companies that otherwise might settle for Class B space opt for nicer surroundings at bargain prices, in part to encourage their employees to return to work.

Office space lease rates both in downtown and southeast have remained stable over recent quarters. But analysts caution that those rates may not reflect concessions that are being offered in exchange for new leases, including offering shorter terms.

Meanwhile, overall office vacancy rates that were improving a year ago as the pandemic waned have once again ticked higher during the months that followed.

In the southeast market spanning from Hampden Avenue south through the Denver Tech Center to Lone Tree and Centennial Airport, available sublease space has now topped the highest levels reached during the pandemic, with some 1.8 million square feet now available, according to the report.

Trybe’s Katz and other analysts attribute the weakening market to uncertainties about the national economy, interest rates, and the approaching midterm elections.

“Prospects are being really cautious right now,” Katz said. “We’re getting activity, but they’re kicking the tires and being more deliberate and metered about location and investing in expansion.”

Some brokers are glimpsing a brighter picture in segments of the market.

“We’re still seeing some pretty decent demand,” said Jason Startari with Transworld Commercial Real Estate in the Tech Center, whose book of business includes investors purchasing owner-occupied buildings such as medical offices.

Like Katz, Startari senses uncertainties around the prospect of employees returning to work and whether banks continue to offer favorable loans to property investors.

“I’m definitely seeing a price adjustment based on higher rates,” he said. His current focus is on setting the right expectations for clients with respect to pricing.

Trybe is steering well clear of office acquisitions now, Katz said, but the outlook for alternative commercial spaces is another story.

Those include what Katz calls flex-industrial or small-bay industrial spaces in the 2,500 to 5,000-foot range. Those are proving popular for their adaptability to smaller office and warehouse use and for handling service trucks. Locations of those properties, Katz adds, are likely outside of the central business district, offering good freeway access while being less affected by the center city’s challenges.

On the retail side, the CBRE report shows rates for new leases continuing a modest rise. Rates now average $20.53 per foot, with strip center and in-line centers showing a bump, while power centers and neighborhood shopping remain flat.

Some analysts suggest any retail market strength probably owes more to neighborhood shopping with its local services, than to big-box operators that are continuing to face challenges from on-line competitors.

“The smaller neighborhood retail like nail shops, people are always going to need that,” Katz said. “But the retail that competes with online ordering, that retail is struggling; there’s little need for it.”