CREJ - Office Properties Quarterly - October 2015
If the financial crisis of 2008 and the subsequent recovery revealed anything about Denver, it’s that Denver is not the same city it was when it recovered from the financial turmoil of the late 1980s and the early 2000s. This time around, Denver is one of the metropolitan statistical areas with the strongest and steadiest recoveries in the nation. Denver’s strong recovery is due to several factors and has led to a sea change on how people, companies, and commercial real estate investors and developers view Denver. One of the key drivers to Denver’s recovery over the past seven years is the sheer growth of the city’s population. Denver proved to be highly attractive to educated workers and millennials especially – so attractive that Denver ranked third in the nation among cities that increased their percentage of college graduates between the ages of 24 and 35 from 2000 to 2012. There are myriad factors driving this in-migration but, whatever the reasons, this trend continues today. As more people have moved to Denver, so too have more companies. The past decade has seen Fortune 500 companies including DaVita and Arrow Electronics make Denver the home of their corporate headquarters. Other large corporations that have expanded their presence in Denver include Charles Schwab, WeWork, Comcast and Fidelity Investments. As this in-migration relates to Denver’s central business district, some prominent companies, which historically have been based in the suburbs, are now planting a flag downtown. ProLogis and Liberty Media are notable examples. Both companies are creating a downtown presence, in part, to enhance their ability to recruit top young talent in the area. While traditionally suburban companies moving downtown is a trend to monitor, the big change in Denver’s CBD is the incredible growth of residential units. In the not-too-distant past, Denver had a ratio of only one downtown resident for every 6½ downtown jobs, one of the lower ratios of major MSA’s in the country. During the current development cycle, however, Denver is on pace to more than double the amount of apartment units around the city’s urban core with more than 10,000 multifamily units ultimately coming on line this cycle. The Denver metro area made a concerted effort to prepare for this growth through the continual development of its transportation infrastructure. A thoughtful and well-executed redevelopment of Union Station allowed the 120-year-old depot to reclaim its spot as the crown jewel of the state’s mass transit system. RTD will more than double the size of the light-rail service area in 2016. The most exciting of these new lines has to be the A line, which will offer service from Union Station to Denver International Airport and connect River North, Elyria-Swansea (including the National Western Complex) and Stapleton, among other neighborhoods to the rest of the light-rail system. All of these factors caused many institutional and international real estate investors to spend more time evaluating and pursuing investments in the metro area. New highs have been set on pricing of office, industrial and multifamily properties. Areas that hadn’t seen much institutional interest in past real estate cycles, most notably Boulder, have seen significant investment from institutional buyers during the recovery. This increased interest in the Denver metro area on an investment basis has been echoed by developers. Most of the development in the pipeline is in downtown Denver and multiple product types are seeing growth. As of July, there were 1,576 hotel rooms, nearly 4,500 residential units, more than 2.3 million rentable square feet of office space and 230,000 rentable sf of retail space under construction in the CBD. That said, developments in suburban locations like Village Center Station, Fitzsimons Life Science District and Belleview Station are driving growth in areas outside Denver’s CBD. While there is a lot to be optimistic about in the Mile High City, there also are some warning signs to note. Denver has a more broad-based economy than ever before, but the turmoil in the oil and gas market is having an effect on downtown Denver’s office market in particular. The amount of sublease space available downtown has approximately doubled in the past year and a half, owing in part to the uncertainly in the energy markets. Further, while relatively affordable housing was a catalyst to growth over the past decade, the rise in housing costs in Denver over the past year has been the highest in the nation (of major cities) on a percentage basis, at a nearly 10 percent increase year over year. Traffic to mountain destinations has steadily become more of a deterrent to locals heading to the hills. And legalized marijuana, while an attractant for some of Denver’s newer residents, has left some corporate site selectors with questions as to whether Colorado is the best long-term home for their companies or clients. Overall, what a difference the past decade has seen for Denver as a city. Expect the positive trends to continue and for Denver to evolve as a city and an economy. The region will continue to grow in tech, professional services, health care, aerospace and other industries as the base of the economy continues to broaden. Oil and gas will struggle in the near term and there will be more attrition to come. However, the energy markets eventually will recover with many companies coming out of the current downturn leaner and meaner than their previous incarnations. So-called “re-shoring” efforts will drive continued growth in regional manufacturing and distribution jobs. Denver will solidify its status of having an urban core that is active 24 hours a day. Denver will undoubtedly be a fun place to live and work in the years ahead.