Denver Tops the Industry as the Commercial Real Estate Market to Watch For

Denver ranks as a top 'market to watch' for commercial real estate

Denver Business Journal | By Dennis Huspeni | 1/17/14

Denver's commercial real estate market ranks at No. 11 among 2014 "Markets to Watch" nationwide, up three spots from 2013, in the Emerging Trends in Real Estate report fromPricewaterhouseCoopers LLP and theUrban Land Institute.

The report was released by ULI Colorado at an event Thursday at the Embassy Suites Denver – Downtown/Convention Center hotel.

“Survey respondents see the outlook for investment, development and homebuilding prospects to be good for 2014,” according to the report. “Denver is intriguing to a number of interviewees. Some see it as an established core market, while other see it as more of an opportunistic location.”

Some highlights from the report:

• 51.3 percent of those surveyed gave Denver’s retail property a “buy” recommendation, while 40 percent listed it as “hold.”

• 51.6 percent rated local industrial/distribution property at a “buy” recommendation, while 39.3 percent listed it as “hold.”

• 50 percent rated Denver office property a “buy” and 33.6 listed it as “hold,” while 16.4 percent rated office property here as a “sell."

“Denver is positioned to be an above-average performer in the coming years,” the report states. “High industrial diversity and a well-educated workforce provide numerous avenues for growth.”

According to one hedge fund official surveyed: “Secondary cities, or ‘institutional core cities,’ are the market to invest in for up-and-coming funds. Examples are Denver, Houston, Dallas and Seattle. These ‘core’ markets are ideal for development, as that will be the way to make money in 2014. With the higher risk, they could earn a higher return.”

Panelists at the Thursday event burrowed into the Denver market with statistics and observations from the street level.

“The investment market here just had an incredible year,” said HFF senior managing director Mary Sullivan. “Our team sold just under $1 billion dollars. The values for these assets are exceeding previous highs and the new assets are breaking historic record levels.”

Jeff Hawks, principal at ARA Colorado, said interest rates remaining at historic lows made commercial real estate investments soar.

“It just doesn’t get better for cash flow investments,” said Hawks, a Denver multifamily market expert.

John Beeble, chairman and CEO of Saunders Construction, said the company finally got up to “normal” levels of construction activity in 2013, but the challenge has been to find construction workers. He also predicted construction costs would continue to rise, up to 4 percent in 2014.

“The worst hit [for the labor shortage] is multifamily, anything with lumber,” Beeble said. “Framers are almost impossible to find.”

Panelists also addressed the lack of for-sale multifamily development and attributed it to Colorado’s construction defect laws.

“Colorado has some of the worst construction defect laws in the country,” Hawks said. “It’s stupid to try and build a condo development until that changes.”

Beeble said they don’t build condos for that reason.

“We’ve been in business for 42 years and never been sued for construction defects,” Beeble said. “But the odds are close to 100 percent that we’d be in court defending ourselves if we did condos.”

As far as how long the CRE market will continue to improve, CBRE Group Inc.’s Jessica Ostermick, director of research and analysis, said a look at previous down cycles showed the market will continue to improve until at least mid 2017.

“We still have quite a bit of ways to go,” Ostermick said.

Hawks said for those worried about apartments being overbuilt here, that shouldn’t be a problem for the foreseeable future.

“[Denver Regional Council of Governments] predicts we’ll hit 4 million in population by 2029,” Hawks said. “We’ll have to deliver 19,000 units every three years jut to keep up with population growth.”

In its 35th year, the Emerging Trends commercial real estate study is based on surveys of more than 1,000 commercial real estate experts, including investors, developers, lenders and brokers.