After a brutal two-and-a-half years for metro Denver area office space — where vacancy rates hit historic highs as employees worked remotely and businesses reprioritized real estate needs, 2023 shows promise.

That’s according to a fourth quarter office and industrial space report from real estate giant CBRE.

“There’s certainly real challenges out there and it’s not going to be an overnight fix, an overnight phenomenon, and we’re back to where we were but things are steadily improving,” Ryan Link, senior vice president with CBRE, said. “I think if things continue to improve you’re going to start seeing more activity and more interest on the retail front and your going to start to see more people flooding the streets of downtown like we used to, it’s certainly improved though.”

Link focuses on office space tenants. He said the majority of leases completed in metro Denver last year were groups that had previously been in the market. Overall, he remains bullish on Denver office space leading into the new year based on the strong 2022 finish.

For Denver’s office space, there was a 20% increase in the total vacancy rate with just over 1.0 million square feet of leases transacted and no new office space properties breaking ground. However, there was an improvement in positive net absorption — or new leases — compared to 2021 with the annual total to negative 2,600 square feet compared to 2021’s total of negative 2.1 million square feet.

Subleasing activity in office space increased by 12% quarter-over-quarter and  39.9% year-over-year, reaching 6.1 million square feet. This trend is complicated to examine, according to Link. It’s not as clear as absorption data, but there are businesses testing the waters in the sublease market whether it’s to get rid of unused office space or move to new locations.

Employment is trending up compared to previous years in the CBRE report, with professional and business services taking up the largest portion of the increase. That bodes well for businesses needing space for those employees to work.

While leasing activity was largest in the southeast region (34%), downtown followed closely behind at 32%. Downtown leasing was still down by 38.4% year-over-year in 2022, leading to the question of whether the improved downtown office leasing will translate to more workers downtown to support retail businesses.

Industrial spaces differ from office spaces in that they are typically warehouses that are single story buildings ranging from 10,000 square feet up to millions of square feet. It can also include lab and manufacturing spaces.

Overall, the sector faired well in the fourth quarter and in 2022 according to data from the CBRE report. Leasing volume increased over 2 million square feet in Denver, leaving the annual total at over 11.2 million square feet. Most of the leasing activity was in the transportation and distribution market. There was 1.3 million square feet worth of new construction in the fourth quarter.

While 2022 was a successful year for positive net absorption, it was no match for the exceptionally high numbers reported in 2021 leading to a 52.5% decrease.

Jessica Ostermick, senior vice president at CBRE, focuses on industrial markets and logistics. She said most industrial-space companies are “in it for the long game.” Those companies work with a 10-to-20 year focus on delivering products to consumers, rather than focusing on the immediate risks associated with inflation and a potential recession. Those factors will effect the industrial market, too.

“I think this property sector has much more resiliency facing these economic headwinds … than most other property types because we, really during the pandemic, shifted more and more to an e-commerce consumer buying pattern and that’s sticking around,” Ostermick said.

There is some pull back in the construction pipeline, which started a year ago in the fourth quarter of 2021. While there are new developments becoming available, there is also a good chance businesses will face higher rent costs which have been climbing and will likely continue to do so, according to Ostermick. The airport submarket, which covers much of the I-70 corridor to the east of central Denver, was the highest performer in leasing activity, positive net absorption and development.

“We do expect to see it pull back even more this year because with interest being elevated, it’s more expensive to build and there’s more risk aversion among developers,” Ostermick said. “So we do still see new developments coming online, which is good I think just in terms of being able to provide businesses with space to grow.”