Metro Denver’s office vacancy rate reached a 10-year high during the first quarter of 2023 as economic uncertainty continues to weigh down the city’s commercial real estate market.

The city’s total office vacancy rate increased by 1.4% year-over-year to 20.9%, according to CBRE’s latest market report.

The increase in office vacancies comes as the U.S. economy continues to weather volatility. Borrowing is expensive because of the Federal Reserve’s persistent rate hikes to combat inflation, and large employers are downsizing their office space because of the popularity of hybrid and remote work.

Leasing activity and net absorption continue to be two of the most troublesome segments of Denver’s office market. The city had only 708K SF of office space leased during Q1, which represents a 49% decline year-over-year.

Meanwhile, large employers like law firm Bryan Cave and Tetra Tech reduced their office footprints in March, according to CBRE. Bryan Cave cut its space at 1700 Lincoln St. nearly in half when it re-signed 47K SF of office. Similarly, Tetra Tech relocated to an office space in Union Station that is 18.8K SF smaller than the one the company leased on Indiana Street.

“While there are a decent number of large tenants currently active in the market, bigger corporations are prolonging their decision making and shelving expansions due to factors including the sustained preference for hybrid work and the developing recession,” the report concludes.

Similarly, Denver saw a significant decline in its net absorption, which speaks to the decreasing demand for the city’s office space. In Q1, Denver posted a negative 250K SF absorption rate, led by Class-B properties — which posted net negative 108.9K SF absorption, according to CBRE.

Despite the overall decline in Denver’s office market, some submarkets showed signs of life in Q1. For instance, Longmont and Cherry Creek had vacancy rates of 7.8% and 8.5%, respectively, two of the lowest recorded rates in the metro area. Cherry Creek also has more than 280K SF of office space under construction, which is the third-highest total in the metro area as well.

At the same time, there was a slight uptick in development activity, which suggests that investors still see Denver as an attractive market. Construction reached 2.5M SF in Q1, led by projects like 1900 Lawrence, which is projected to add about 704K SF of office to Denver’s inventory by Q4 2024, according to CBRE. However, no offices were delivered to market during Q1, as projects in the Denver area continue to be delayed, CBRE noted.

“Significant challenges such as increasing vacancy, along with higher capital and construction costs, have impeded the development pipeline in recent quarters,” CBRE’s report said. “But a tightening economy will hopefully promote the Fed to raise interest rates later this year, giving way to cautious optimism among developers as these challenges would likely wane.”