CREJ - Journal

Page 20 —

COLORADO REAL ESTATE JOURNAL

— June 17-June 30, 2015

Finance

hat do the oil crash

of the 1980s and

“big hair” have in

common?

They both represent an era the

Denver commercial real estate

community would like to forget.

My dad liked to tell me that

the ‘80s were both awesome and

horrible at the same time. The

Cold War ended and the Berlin

Wall fell. Movies like “The Blues

Brothers,” “ET,” “Dirty Danc-

ing” and “Full Metal Jacket”

graced the big screen. And Bird

vs. Magic, well LeBron vs. Curry

just isn’t the same. Now, the hor-

rible part had to have been the

fashion: big hair, acid washed

jeans and all the neon. And back

to my dad: He definitely wasn’t

a fan of ‘80s music, which was

a far cry from the music of his

youth.

If you talk to commercial real

estate professionals who worked

in Denver in the ‘80s, the stories

are much more that of the latter,

as the crash of oil prices sent the

Denver economy tumbling. The

late Sherman Miller, an industry

icon and a friend and mentor of

mine, told woeful tales of “see-

through buildings,” newly con-

structed buildings sitting empty

for years. Why, almost 29 years

after the 1985 oil bust, hasn’t the

recent crash in oil prices affected

Denver’s central business district

office market the same way it

did in the ‘80s? It likely can be

explained by two major differ-

ences between the Denver of the

1980s and the Denver of today.

In the late ‘70s and early ‘80s,

thanks to a booming oil industry,

Denver’s economy surged. The

downtown Denver office market

generated record metrics. Over-

all office vacancy reached an

all-time low of 1.5 percent, and

to meet the surge in demand,

developers built and delivered

over 13 million square feet of

CBD office space between the

years of 1980 and 1985. This

more than doubled the square

footage of leasable office space

in downtown Denver. At that

time, the oil and gas industry

occupiedmore than 30 percent of

Denver’s CBD office space and

over 50 percent of CBD high-rise

office space. Then, from Novem-

ber 1985 to March 1986, the price

of oil plummeted 67 percent.

Between the months of June

2014 and January 2015, oil

prices plummeted 57 percent.

There was initial concern about

how

Den-

ver

would

weather the

oil crash. Yet

five months

later,

Den-

ver’s

CBD

office market

is continuing

to be healthy

and vibrant.

So what has

changed over

the past three

decades?

start

with, Denver’s economy is no

longer solely reliant on the ener-

gy industry. In the ‘80s, it was the

only show in town. Today, the

energy industry is the Denver

metro’s third-largest industry

cluster, behind health care and

financial services, which boast

189,000 and 95,000 jobs, respec-

tively. And if you break out the

clean-tech jobs from the energy

cluster, only 30,340 energy sector

jobs are related to O&G. O&G is

actually the fifth-largest industry

cluster, dropping below both IT

and software, and broadcasting

and telecommunications.

A significant proportion of

O&G jobs are still located in

Denver’s CBD. According to an

economic impact study commis-

sioned by the Downtown Den-

ver Partnership, roughly 10,500

of Colorado’s industry jobs are

locateddowntown (34.5 percent).

Research compiled by CBRE at

the end of 2014 showed 25.7 mil-

lion sf of leasable office space,

of which 22.67 million sf was

occupied. DDP’s study found 4.4

million sf of downtown Denver

office space, or 19.4 percent of the

leasable square footage, directly

occupied by O&G users. It also

shows an additional 731,000 sf

indirectly occupied by O&G, the

indirect occupancy often being

a question that arises when dis-

cussing O&G’s share of down-

town office space. So at most

one could argue that 22.6 percent

of the leased downtown office

space can be tied to O&G.

In addition to a more diversi-

fied base of office users in Den-

ver and downtown, the develop-

ment landscape is much differ-

ent than it was in the ‘80s. With

the nation coming out of the

Great Recession, there is much

less new construction in the

pipeline. CoStar indicates seven

office properties currently under

construction in downtown Den-

ver, totaling 1.3 million sf of net

rentable space, only a 3 percent

increase to downtown’s office

supply as opposed to a 126 per-

cent increase in the early ‘80s.

For more than 30 years, we

have helped Denver real estate

investors and developers finance

projects. The lenders we work

with are located across the coun-

try – from New York to Des

Moines, Iowa, to Los Angeles.

Not being in our market day

in and day out, it is important

that they understand the Denver

of today. Fortunately, the major-

ity of these lenders can quickly

rattle off the stats previously

mentioned – only 20 percent of

downtown office space is occu-

pied byO&Gand only 13 percent

by oil. During a recent visit from

theWest Coast, one of Essex’s life

company lenders, who is actively

trying to increase his debt alloca-

tion placed in the Denver market

by 30 percent, told me that he

believes that Denver is firing on

all cylinders and cited the diver-

sification of companies relocat-

ing to Denver as the reason.

In his mind, the infrastructure

put in place over the past two

decades has created a quality of

life that encouraged companies

to relocate to Denver, allowed for

healthy growth and will provide

for continued upside to Denver’s

economy. The overarching mes-

sage we hear from lenders is not

only are they unconcerned with

Denver’s exposure to O&G but

also they believe Denver is still

one of the best office markets in

the nation. Nearly all of our life

company lenders are continuing

to allocate more money to the

Denver market. And commer-

cial mortgage-backed securities

lenders are aggressively trying to

get Denver properties into their

securitizations.

Denver is a much different city

than it was in the ‘80s. So far

we haven’t overbuilt new down-

town office space; it boasts a

broader and diversified econo-

my than that of the past. It is no

secret that real estate is cyclical

and as a real estate profession-

al who will still face numerous

cycles, I am grateful for the city

Denver has become. That leaves

me only to worry about whether

or not acid-washed jeans will

make a comeback and wheth-

er LeBron vs. Curry will ever

become a rivalry that – well –

rivals Bird vs. Magic.

Oil crash then vs. now: The diversification of Denver's economy

Dan Konecny

Vice president of loan

production, Essex

Financial Group,

Denver

commercial businesses.

Land-use restrictions also

would be lifted on property

on the edges of the airport,

and DIA would not seek new

commercial businesses that

would compete with the near-

by Anschutz Medical Campus

and Fitzsimons Innovation

Campus in Aurora.

The agreement requires

approval from the Denver City

Council and Adams County

Board of Commissioners and

would take effect following

voter ratification.

Building planned

in Cherry Creek

Schnitzer West will develop a

“Next-Gen” office building with

ground-level retail on two of four

parcels it acquired in Cherry Creek

North. Civica Cherry Creek will

be the company’s first ground-up

development inDenver.

The 100,000-square-foot building

will occupy two parcels at 230 and

250 Fillmore St. There are no imme-

diate plans for the other properties,

which are located at 242 and 246

Milwaukee St.

David Partners will design the

building. Civica Cherry Creek will

include a multilevel underground

parking garage that will be open to

the public.

Groundbreaking is scheduled for

early 2016with completion inmid-

2017. Jeff Caldwell and Blake Hol-

comb of Pinnacle Real EstateAdvi-

sors represented Schnitzer West in

the land acquisitions.

Civica Cherry Creek is named

after Schnitzer West’s Civic Office

Commons in Seattle. “The first

Civica redefined how office space

could and should work for tenants

and drove tremendous innovation

in Northwest real estate. We think

Civica Cherry Creek will do the

same for Denver,” said Doug

Zabel, Schnitzer West managing

partner.

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