By most measures, the Denver area commercial real estate market has never been in better shape. In most of the major submarkets, rental rates have reached new highs, and vacancy rates have never been lower.

The Central Business District, however, is struggling with subleased space and downsizing of companies, which has kept rental rates flat and driven the vacancy rate to about 15% at mid-year, from a 10-year low of about 12% at the end of 1994.

But there is much to crow about. For the first time in a decade, plans are on the drawing board for spec office buildings. The $4 billion Denver International Airport opened with great fanfare as did the $215 million Coors Field.

Industrial vacancies are so low that a California developer, Majestic Realty Co., is talking about building a 250,000-sq.-ft. spec warehouse in the 750-acre Aurora Business Center.

John Waggoner of Denver's Lowe Enterprises says he's seen significant rental increases in response to the declining vacancies -- "particularly in the A to B+ office market."

Lenders who red-lined Denver during the oil boom and bust of the 1980s because of its glut of space now find it red hot.

Says Doug Jones, president of Jones Realty, a local commercial real estate firm: "I think the market is obviously good. It is not as electric as it was in 1994, which is not to say it is bad, because it is not. But some people had expectations a little high for 1995. I think it will kick up again in '96."

George Thorn, president of Mile High Property Services Inc., also is enthused. "My outlook across the board is very positive," Thorn says. "I'm bullish. But having been through the '80s, I'm cautiously bullish. I firmly believe that with the big infrastructure projects -- DIA, Coors Field and all of the other things going on -- Denver is for real again."

Tim Harrington, vice president of the office division for Grubb & Ellis, also is enthusiastic about the market. "The overall market is fairly healthy," Harrington says. "If you break it down into specific submarkets, we have some that are very, very healthy with very little space available. That is especially true in the southeast suburban and the west markets.

"If you look at the weaker market, you're looking at Aurora (east of Denver), midtown (offices at the edge of downtown) and the central business district, Harrington says.

Sherman Miller, senior vice president of CB Commercial, says every property type is improving. "My gut feel is that all indicators in the market will continue to be strong," he said. "Values are rising for almost every property type."

Miller doesn't think the area will go through the boom/bust cycle it did in the 1980s, despite the most industrial, office, retail and apartment construction in a decade. "There is not such easy availability of financing, and with a lot of corporate downsizing, everyone is being very cautious," he says.

Lowe Enterprises' Waggoner sees the market getting closer to a time that justifies new construction and says that although in general there will be only a relatively small amount of new development, the Denver area will be one of the few active new development areas.

Steve Clarke, president and CEO of Englewood, Colo.-based Prime West, notices that there are some recent changes in the state of the Colorado real estate market. "The most striking change that's taking place in the commercial market in the Denver Metropolitan Area is the rapid increase of rental rates for office properties, with a corresponding decrease in vacancy rates in Class-A and Class-B buildings to the 7% to 11% level in most suburban markets," Clarke says. "This is accompanied by fewer tenant finish dollars being available to tenants, particularly in a renewal situation."

Rick Pederson, senior vice president at the Frederick Ross Co., says office absorption has slowed dramatically because of corporate downsizing and the lack of available space, which has forced many companies to choose build-to-suits. Also, rising lease rates make ownership more attractive resulting in a drop in leasing activity. "Other than that, the office market is fairly healthy," Pederson says.

The third-tier space, however is being converted into other uses, such as housing, hotels or retail. "That's a trend I'm finding around the world," he says.

Greg Morris, executive vice president of Fuller and Co., which like Frederick Ross is a large, local commercial firm, has seen a similar trend.

"In the first six months of the year, approximately 800,000 sq. ft. of multitenant office space has been converted to some other use," Morris says. "That represents 1% of our market."

Doug Wulf, a Fuller and Co. broker, notes that the top office buildings in the Southeast suburban market at mid-year had a vacancy rate of only 2.45%, and rates had risen to more than 20% from the beginning of the year, with the best space getting more than $20 per sq. ft.

Today, Denver building owners are pocketing more than many landlords in Chicago, New York and Los Angeles that have higher rates, Wulf says. That's because operating costs are so much less expensive in Denver.

Industrial, however, may outperform all of the markets, with huge demand and little supply, Pederson says. Most of the activity is near the new airport.

For example, Bill Pauls, managing director of the Denver Technological Center, the premier office park in the Denver area, and the $27 billion General Electric Investment Corp. are developing 1,200 acres in the Gateway area at the doorstep of DIA.

One savvy investor who continues to find the Denver-area market attractive is the legendary Fort Worth, Texas, investor Richard Rainwater. Rainwater is the man who turned the Texas Bass family's fortune of $50 million into more than $1 billion. His real estate investment trust, Crescent Real Estate, has purchased prized office buildings and hotels in downtown Denver, the strong submarkets of Cherry Creek and the Denver Technological Center office park.

"It is pretty obvious that Denver outpaced the U.S. average in the early 1990s," says Gerald Haddock, president of Crescent. "It probably will tail off some but will still be way ahead of the average."

Steve Leonard, president of Pacifica Holding Co., has been a big buyer of office, retail and industrial properties and, more recently, land.

Since the early-1990s, Pacifica paid about $160 million for 6.25 million sq. ft. of space, which today is valued at about $220 million.

With bargains harder to come by, Leonard's buying spree has slowed, but he's looking to develop a couple of spec office buildings and so-called "flex-space" hybrid building that combines office and industrial uses in several locations.

"The real play is in office and industrial," Leonard says. "There are some big players getting ready to get into it, especially in the northeast area around DIA."

He points to Bill Pauls, general manager of the Denver Tech Center and another huge office business park south of Denver called the Meridian International Business Center, who bought 1,200 acres near DIA.

Millions of square feet of industrial properties, offices and hotels eventually will be built on his property at the doorstep of the airport.

Another big player near the airport is Majestic Realty, one of California's largest developers. It is planning a 250,000 sq. ft., spec industrial building after it purchases the Aurora Business Center this fall.

Bruce Etkin, chairman of Denver-based Etkin Equities Inc., has been the Energizer Bunny of buying commercial real estate. And unlike others, he plans to keep buying, and buying and buying. "We see significant, continued reduction in vacancy rates," Etkin says, "and we see rental increases of 20% to 25% in most product types."

Etkin thought it would take another five years before buildings sold for their replacement cost, but now he sees it hitting that mark within two years. "We see a significant amount of new construction getting ready to go and we're extremely happy about it," he says. "That's because new construction means rents have risen high enough to justify it."

Terry Hart, marketing manager for LaSalle Partners, is glad they didn't pull out of Denver during the tough times. "We made a bet to stay in Denver, and it was the right thing to do," Hart says. "We oversee a portfolio of 2 million sq. ft. here and 175 million sq. ft. around the U.S. and Europe. We've been really impressed by the tremendous activity in Denver in 1994, and while things have slowed a bit in 1995, it hasn't slowed to the point where we are worried."

Jeff Castleton, director of marketing and leasing for COMPASS, the management arm of Equitable, sees the same trend. "We enjoyed a big increase in lease rates in 1994, but now rates are remaining flat in the Central Business District," he says. COMPASS' downtown buildings include the 654,093 sq. ft. 17th Street Plaza that was 94% leased at mid-year, the 328,000 sq. ft. Mellon Financial Center, also 94% leased and several smaller buildings, many of them 100% occupied.

There has been some concern that the Denver-area apartment market is becoming overbuilt, but Jeff Hawks, an apartment expert with CB Commercial, believes if anything, the area faces a shortage of units. "Even with immigration slowing down, we're seeing 30,000 people being added to the metro area," Hawks says. "And we're only building 3,500 to 4,000 units per year, while in the early-1980s, we were building 9,000."

Meanwhile, the Colorado Springs market, 55 miles south of Denver, is booming.

"I see continued strength," says Les Gruen, vice president and director of research for Palmer McAllister Co., a dominant commercial real estate firm in the Springs. "The big constraint we have in Colorado Springs right now is the lack of large blocks of contiguous space. Hopefully, we'll see more spec construction."

Lease rates in Colorado Springs are cheap even by Denver standards, and Denver rates still are among the lowest in the country.

"That's true," Gruen says, "and we still have a beautiful city and a tremendous quality of life compared to just about anywhere in the country."