As downtown Denver’s office vacancy climbed to levels not seen since the 1980s oil bust, the question has long been how much worse can the market get before it gets better.

But a new report suggests downtown is heading into a new phase of the cycle — but still faces a long road ahead toward recovery.

The city’s downtown office market vacancy rate rose in the second quarter to nearly 37%, according to commercial real estate firm CBRE, up by 6 percentage points from the same time two years ago. It’s even higher in Upper Downtown where about 40% to 46% of the real estate is empty.

Lower Downtown is faring much better at 19%. 

Despite this, the report said there’s some “encouraging signals” across the data.

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The reason the vacancy rose in the last quarter is tied to Xcel Energy leaving its 314,000-square-foot downtown headquarters at 1800 Larimer for a brand new and smaller office building in the River North Arts District (RiNo), which has been expected since the energy company confirmed the move in late 2023, the report said.

If it weren’t for Xcel’s major move, which CBRE called an “outlier,” downtown Denver might have seen positive absorption, a measurement of whether companies are wanting more real estate or getting rid of it.

Leasing activity is up almost 22% year-over-year, the real estate brokerage said.

“That’s not a rebound, that’s a reflection of companies engaging, looking at longer-term commitments and having more confidence in Denver,” said Ryan Link, senior vice president at CBRE.

As remote and hybrid work quickly became widespread, companies across the nation whose leases were at their end decided not to renew. They opted for other cities, new neighborhoods like Cherry Creek and RiNo or — if they stayed in downtown — downsized to smaller offices.

Downtown Denver also was dealing with impeding construction from the delayed 16th Street Mall project that drove many shops and restaurants out. There’s also been growing concerns over public safety since the pandemic with the nagging perception of downtown’s rise in violent crime, public drug use and homeless encampments (which Mayor Mike Johnston made a priority to drive out when his term began, and has largely been successful clearing the central business district). Recent Denver Police Department data shows violent, property and drug crimes on 16th Street dipped in 2024.

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The area is still seeing a flight to quality, according to Link. Companies have been leaving older office buildings for flashier and new properties with trendy amenities, which has made Cherry Creek a hotspot in the market despite national trends.

The market is now in a position of playing “musical chairs” with the supply, Link said.

There’s been no new office construction projects in the pipeline for downtown since the 1900 Lawrence opened last year, the report said, meaning there’s no new supply that could exacerbate the vacancy rate.

“We’re certainly entering a new cycle, and one that’s certainly less defined by new construction, but more by repositioning of assets,” Link said.

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One other improving metric is subleasing activity. The report said it’s picked up, suggesting there’s “more stabilization” among companies that were more heavily impacted by remote and hybrid work.

The amount of subleasing space available in downtown Denver fell by nearly 30% year-over-year to 1.4 million square feet.

But even if interest is rising among companies looking within downtown, Link said recovery could be slowed as companies are taking longer than usual to make final decisions. And many landlords are also looking to get rid of their properties as building valuations drop, opening new opportunities for buildings.

“There’s a lot of these landlords that are selling their assets and new blood coming into town changing things up,” Link said.

For example, two skyscrapers on 17th Street sold for $3.2 million to a California developer Asher Luzzatto. The sale price was at a whopping 90% below its 2019 value, estimated at $200 million, and the developer has plans to convert the buildings to 700 apartments.

One problem down, several more to fix

While downtown may be seeing improvements in some metrics, there’s still many problems and its recovery will take a long time, said Mark Levine, professor of real estate and construction management at the University of Denver .

“Maybe it’s a little extreme, but if you’re heavily wounded and any one of these three wounds could cause death and you repair one of the wounds, it’s wonderful,” Levine said. “But you still have two more.”

The vacancies are still high, building valuations are falling and public safety is still a real concern, Levine said.

Another company is also making a big exit next year, as TIAA plans to leave its downtown Denver tower three years before its lease expires in 2029, relocating about 1,000 jobs to Texas.

“There’s just a lot to absorb. We gotta make some economic decisions here, tearing down space, doing other things,” he said, adding that until a major company in the realm of Google or Amazon signs a large lease to signal to the market that downtown is attractive and the place to be, there’s a lot of room to improve.

Downtowns, like most economies, go through cycles.

Denver’s urban core has been through several of its own ups and downs such as the oil bust in the 1980s and officials have reminded the public this is just another cycle to power through and there’s been some positive momentum to be hopeful about.

Crime on 16th Street has dropped from highs in 2021 and 2023, the city has created a new downtown police unit and 16th Street is nearly finished.

And just last week, Johnston announced a $100 million investment from the Downtown Development Authority to revitalize several downtown parks and convert two historic buildings from offices to housing, a plan to prepare two parking lots by Denver Pavilions for redevelopment and attract new retailers to the city center.

But downtown was also shocked after a man stabbed four people along 16th Street over a weekend in January, killing two people — denting already poor perceptions of public safety ahead of the mall’s long-awaited reopening this summer.

“Every time we have something like that, it counters the positive momentum,” Levine said. “And of course, it always does balance out” with time.

But the question isn’t if Denver’s downtown will recover, he added. Rather, how long will it take?

“And I don’t have that answer,” Levine said. “But I do know that it’s not nearly as quick as a lot of people had projected.”