A comprehensive analysis of risk, return, and strategy considerations for Denver office investors evaluating different quality tiers.
The Quality Question
Denver’s office market presents investors with a fundamental question: invest in Class A properties at lower yields but with greater stability, or target Class B properties at higher yields with more uncertainty? The answer depends on risk tolerance, investment timeline, and capital availability. This analysis examines the tradeoffs to help investors make informed decisions.
Defining Class A and Class B in Denver
Class A Characteristics
Class A office buildings in Denver typically feature modern construction or recent renovation, high-quality finishes, professional property management, premium amenities (fitness centers, conference facilities, food service), efficient floor plates, and prime locations with strong accessibility. These buildings compete for the highest-quality tenants and command top-tier rents.
Class B Characteristics
Class B office buildings offer functional space at lower rents but with fewer amenities and often dated finishes. These buildings may be older Class A properties that have aged, newer buildings in secondary locations, or properties that never achieved Class A status due to design or construction quality. Class B buildings appeal to cost-conscious tenants and those with less demanding space requirements.
Current Market Performance Comparison
| Metric | Class A | Class B |
| Vacancy Rate (Metro) | 18-22% | 28-35% |
| Prime/Best-in-Class | 6.7% | N/A |
| Asking Rent Range | $32-55/SF | $18-28/SF |
| Leasing Activity Share | 70.1% | 29.9% |
| YoY Leasing Change | +17.9% | -14.6% |
| Cap Rate Range | 6.5-8.5% | 8.5-12.0%+ |
Source: CoStar, SVN Denver Commercial, CBRE Denver Office Figures, Q4 2024
The Flight to Quality Impact
The flight to quality has dramatically widened the performance gap between Class A and Class B office in Denver. In Q4 2024, Class A properties captured 70.1% of total leasing activity with 837,000 square feet, while Class A leasing increased 17.9% year-over-year. Meanwhile, Class B leasing declined 14.6% year-over-year.
This divergence reflects how companies are approaching office space in the hybrid work era. Rather than simply reducing square footage, many companies are reducing quantity while upgrading quality—taking less space but in better buildings. This trend benefits Class A at the expense of Class B.
Investment Case for Class A
Strengths
Lower vacancy risk: Prime Class A buildings in Denver record vacancy around 6.7%, compared to 22.5% for the overall market. This stability reduces income volatility and downside risk.
Tenant quality: Class A buildings attract creditworthy tenants with longer lease terms and lower default risk.
Rent growth potential: Limited new Class A supply and strong tenant demand support rent growth over time.
Liquidity: Class A assets attract broader buyer pools, including institutional investors, providing exit liquidity.
Weaknesses
Lower yields: Cap rates of 6.5-8.5% provide less current income than Class B alternatives.
Higher basis: Premium pricing means more capital at risk and greater exposure to value declines if fundamentals deteriorate.
Cap rate compression required: Total returns often depend on cap rate compression at exit, which is not guaranteed.
Investment Case for Class B
Strengths
Higher yields: Cap rates of 8.5-12.0%+ provide stronger current income, which can offset some vacancy risk.
Value-add potential: Class B buildings can potentially be repositioned to capture flight-to-quality demand through renovation and amenity additions.
Lower basis: Discounted pricing provides margin of safety and limits downside exposure.
Conversion potential: Some Class B buildings may be candidates for conversion to residential, hospitality, or other uses.
Weaknesses
Higher vacancy: Vacancy rates of 28-35% create significant income uncertainty and carrying costs.
Tenant quality: Smaller, less creditworthy tenants increase default and turnover risk.
Capital requirements: Repositioning requires significant capital investment with execution risk.
Limited liquidity: Smaller buyer pool and financing challenges can limit exit options.
Strategic Recommendations
For core investors seeking stability: Focus on Class A buildings in prime submarkets (Cherry Creek, LoDo, Boulder). Accept lower yields in exchange for lower vacancy risk and quality tenant bases.
For value-add investors with capital and expertise: Selectively target Class B buildings with strong bones, good locations, and realistic repositioning potential. Underwrite conservatively with significant contingency for renovation costs and extended lease-up periods.
For opportunistic investors: Consider distressed Class B assets at deep discounts where alternative use conversion may provide upside beyond traditional office repositioning.
Bottom Line
The performance gap between Class A and Class B office in Denver has widened dramatically, creating distinct investment opportunities depending on strategy and risk tolerance. Class A offers stability at lower yields, while Class B offers higher yields with greater uncertainty. In today’s market, the flight to quality makes Class B investment more challenging than in previous cycles—success requires realistic underwriting, significant capital for repositioning, and patience for extended lease-up timelines.
About SVN Denver Commercial
SVN Denver Commercial helps investors evaluate Class A and Class B office opportunities based on individual investment criteria and risk tolerance. Contact us to discuss Denver office investment strategies.