Commercial builders weigh risk, opportunity: office and industrial slowed by vacancies, but retail chugs on.

• Author: Lewis, Pete
• Position: Q4 Real-estate report

The real-estate industry doesn't like to talk about bubbles. After all, bubbles eventually burst. Local commercial real-estate professionals may concede the possibility of a bubble in the residential market, but they view their segment of the industry as far too rational and predictable, far too much of a reflection and response to solid economic principles and financial fundamentals to allow a commercial real-estate bubble ever to inflate. Job growth impacts vacancy rates. Vacancy rates influence rental rates, which correspond to sale prices and new construction. Commercial real estate prefers cycles and curves to bubbles. "We're always moving toward equilibrium, but we never quite get there," said Jody Balaun, principal at Arete, a firm that represents commercial tenants. "As soon as we approach equilibrium, things change."

Economic trends appear to bode well for Metro Denver's commercial real-estate market. Employment peaked in December 2000 with more than 1.4 million people working in the seven county area, then dropped by 123,200 net jobs from 2001 to 2003. Early 2004 marked the beginning of an employment rebound with a 0.9 percent net increase in jobs for the year. The region added another 28,000 jobs in the first half of 2005. Patty Silverstein, chief economist for the Metro Denver Economic Development Corp., predicts 2.5 percent employment growth for 2005 and 3 percent for 2006.

"We're definitely in recovery and the (office) market is stabilizing," Silverstein said. "Employment is up and vacancy rates are declining."

While vacancy rates are dropping in both the office and industrial markets, Silverstein said the industrial market still may be two years away from healthy vacancy rates. This is partly due to the nature of our economy. Colorado is not a strong manufacturing state, and the majority of the recent employment up-tick appears to have come from additional office workers.

Office developers also reacted more quickly and more dramatically to the regional and national economic downturn. In 2001, 7.7 million square feet of new office space was built in the region. By 2004, that number dropped to 1.2 million. Industrial development remained relatively steady through 2003, declining only recently (1.8 million square feet in 2004, compared with 2.8 million square feet in 2002.)

"The drop in (office) vacancy rates is the result of job growth and lack of construction activity," Silverstein said. "The industry responded quickly and...