CREJ - Office Properties Quarterly - March 2017
Over the last several years, Denver has transformed from a burgeoning market into one of the premier cities in the country. It has received numerous accolades including being named the best place for business and careers by Forbes. The city has recovered extraordinarily well from the recession, experiencing substantial job growth. In the 12 months trailing November, Denver employment grew by over 3.9 percent, one of the highest job growth rates in the nation. This statistic might seem counterintuitive due to the perception that much of the city’s economy and employment is tied to the oil and gas industry. Despite this perception, Denver actually has the most diverse industry make-up among nine major metropolitan statistical areas and is 21 percent more diverse than in 2005. This increased industry diversity is directly correlated with two intertwined factors – population growth and corporate migration to Denver. Denver’s 9.9 percent population growth between 2010 and 2015 is third in the nation among the 20 largest MSAs, with a significant portion of these astonishing gains attributed to millennials. Millennials account for 60 percent of metro Denver’s population growth and over 21.4 percent of the total population. Denver had a net annual migration of 12,682 people between the ages of 25 to 34 from 2009 to 2014, the highest in the country. Colorado, as a whole, is experiencing a similar influx of millennials, with the net migration from that age bracket far outpacing all others. This educated group is enticed by attributes beyond the lifestyle, 300 days of sunshine and outdoor activities the city offers. Denver’s cost of living index is low compared to other major metros and compares favorably to the top 10 cities for millennials. As Denver has drawn a major influx of young, educated and skilled labor, major corporations have followed suit. During 2016 alone, companies such as Comcast, Zillow, Charter Communications, Uber, Transamerica and BP announced plans to relocate operations to or expand their current offices in the Denver area. Additionally, Amazon and Facebook have shown noteworthy interest in the area and see Denver as a significant growth market. Another major factor in corporate movement to Denver involves the city’s relative discount to other major economic and tech hubs. The corporate tax rate in Colorado is a flat 4.63 percent, nearly 48 percent lower than in New York and San Francisco. Additionally, average office rents in Denver are $26.99, over 63 percent lower than New York and San Francisco, 17 percent lower than Austin, Texas, and 12 percent lower than Seattle. The access to an educated workforce and the lower overhead makes Denver the ideal location for a corporation to open a major office. With the influx of young individuals to the area and a diverse set of major corporate players, domestic and foreign investors alike have taken a long position on Denver commercial real estate. Last year saw the entry of, among others, Korean and Chilean capital to the market, and many domestic players began making Denver a primary target market. Capital is beginning to compare the market to Pacific coastal areas such as San Francisco and Seattle rather than Austin or Salt Lake City. Even more alluring is the cost discount on a cap rate basis Denver provides compared to the coastal markets. With in-place cap rates 75 to 100 basis points higher in Denver, investors see opportunity to acquire quality real estate in a significant, yet still expanding, market. For the aforementioned reasons, development activity has increased significantly, especially downtown. Capital is excited by Denver’s population expansion and corporate presence in the area. Over 54 percent of the buildings in the central business district were delivered in the ’80s, with little development over the last 25 years. Developers see the lack of new product and extensive corporate user interest as significant demand drivers for new developments. In addition, unlike major cities such as San Francisco and Los Angeles, there are still major growth opportunities in Denver from a geographic perspective. River North is the next major micro-market in the urban core, facilitated and backed by the city through infrastructure spending and cityscape plans. Other areas of current and future growth include the Golden Triangle, which has experienced significant multifamily and creative workspace developments. These have attracted major capital sources to the area, displaying investors’ desires to find the next up-and-coming Denver neighborhood. Despite the positive attention Denver is generating, there are some issues it faces compared with more established markets. For one, there is a limited presence of Fortune 500 headquarters. Ten Fortune 500 companies are headquartered in Colorado, compared to the 37 in Illinois and 25 in Ohio. A key factor that could help lure a Fortune 500 headquarters to the market is Denver’s state-of-the-art airport. Denver International Airport is the fifth busiest airport in the country and 15th in the world. Despite heavy use, the experience is favorable compared to an airport like O’Hare. Beyond the experience, it is one of the few airports in the nation that allows travelers to reach both Europe and Asia in one day and is continually expanding international routes. Also, the homeless situation in Denver is significant. As a very complex and delicate issue, there does not seem to be a pragmatic solution to the large number of homeless individuals present in downtown who reside around commercial and residential properties. There is no easy answer to this issue, but it is one that needs to be addressed. The final issue involves the challenges with the suburban market. As some companies move to the CBD from the suburbs, investors see it as a significant weakening in the submarket. However, there have been recent large expansions completed by corporate users in the submarket including Comcast, Charter Communications and Arrow Electronics. While locals complain about traffic and transportation issues, those from other major markets see the ease and speed at which one can travel from downtown to the suburbs. The Regional Transportation District expansion has made it more convenient than ever to travel between the two areas and, compared to markets such as L.A., New York and Chicago, the 15- to 45-minute commute is insignificant. Although certain issues exist, significant progress has been made in mitigating them, and there is nothing to indicate that the Denver market will diverge from its current path of growth, expansion and economic success.