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Climbing Denver's Rocky Market

Denver established itself as a boom-and-bust market in the 1800s, when the Mile High City's economy hinged on the whims of railroads and mining operations. That legacy persisted in recent decades, as oil and real estate shakeouts in the late 1980s left half-empty downtown office towers with “see-through” views from the outside. In the late '90s, the regional economy soared on the strength of its technology and telecom industries, pushing vacancy rates below 8% in the office, retail and industrial markets.

The tech and telecom bust of recent years, however, bloodied Denver with some of its highest vacancy rates and job losses since the late '80s. This year, local real estate and economic observers predict a long-awaited recovery.

Citing the improving national economy and the long-awaited stabilization of the technology industry, University of Colorado economist Richard Wobbekind estimates that Colorado will add 43,100 new jobs this year — for growth of 2% — and 45,000 next year. That comes after a slight gain of only 9,300 jobs last year and combined losses in 2002 and 2003 of 78,300 jobs.

“The overall forecast has every sector turning positive in job growth, although some of them by very small amounts,” says Wobbekind, director of CU's Business Research Division. “I wouldn't rave as much about the number of jobs as much as the positive trend.”

Any recovery would be welcome in the commercial real estate market. Examples of the market's troubles in recent years include regional phone giant Qwest vacating 14 floors in its former headquarters, a 38-floor, 683,000 sq. ft. downtown tower now at 64% occupancy. In addition, mergers and bankruptcies took a toll. Rhythms NetConnections, an Internet provider that once employed more than 2,000 in Denver, filed for bankruptcy protection in 2001 and shed nearly all of those workers before WorldCom bought it out in 2003.

As a result of the carnage, Denver's office vacancy rate hovered around 18% last year and new construction in several sectors slowed dramatically, according to CB Richard Ellis. Only recently have job gains, a rise in local retail sales and the improving national economy signaled a rebound. Other factors bringing cause for hope include voters' approval in November of the $4.7 billion FasTracks mass transit project, calling for at least six new light-rail and commuter rail lines that will be complemented by adjacent commercial development.

Other catalysts for improvement include the newly expanded Colorado Convention Center, as well as more than half a dozen massive redevelopment projects spanning a cumulative 5,700 acres, including the ongoing redevelopment of 3,000 acres at the former Stapleton International Airport. (see story on p. 40)

In advance of the predicted recovery, Denver's story in 2004 was one of investors aggressively targeting safe plays, according to Brad Neiman, senior vice president of Northstar Commercial Partners, a Denver-based investor. Last year, Neiman tracked 218 investment deals in Denver totaling $2.1 billion. By comparison in 2003, he logged 109 deals for $1.1 billion.

“It's a second-tier market, and it gets the same attention that a first-tier market gets,” Neiman says. “That's just because the capital is chasing opportunity. The capital is not distinguishing between first- and second-tier markets.” Amid the recovering economy, the outlook for Denver's market differs from sector to sector. Few dispute that the overall trend signals improvement.

Looking Up from the Bottom

Few markets illustrate Denver's volatile nature better than the office market. The oil and real estate bust of the late '80s swelled Denver's direct vacancy rate — excluding subleased space — to 25%, according to CB Richard Ellis. In the midst of the Internet boom of the late '90s, direct vacancy shrank below 8% as Denver added tens of thousands of jobs and ranked among the top five states nationally for venture-capital investment. The subsequent meltdown of the tech sector pummeled Denver's office market, keeping vacancy rates between 17% and 18% for all of 2004, and new construction ground to a halt.

Many now see a small recovery due to Colorado's awakening job market. Transwestern Commercial Services predicts vacancy rates will fall to nearly 15% this year. As for net absorption, the market soaked up more than 1.1 million sq. ft. in 2004 compared with negligible absorption of 28,733 sq. ft in 2003.

Doug Bakke, a CB Richard Ellis broker, cited two indicators of a rebound. First, tenants in the past 18 months have reduced the amount of space they sublease to other users. Second, tenants are moving into the previously unused “shadow” space they held for expansion. “Tenants are using all their space now,” emphasizes Bakke.

The recovery will affect Denver's diverse submarkets differently. The market's tech-heavy northwestern section, dominated by the U.S. 36 corridor from Denver to Boulder, still suffers from a 30.7% vacancy rate. In contrast, the more diverse Denver downtown registered 14.2% vacancy for the fourth quarter, which mirrored the direct office vacancy rate for office properties nationally at 14.2% through mid-2004, according to Transwestern.

Despite positive signs in office absorption, Bakke predicts no rent increases this year. His firm pegged the average asking rent in Denver at about $15.18 per sq. ft., full-service gross, at the end of 2004. That compares to $16.77 per sq. ft. in the stronger economy of 1998.

A recent sign of Denver's rebound came in the form of a mega-deal closed in early January. German-based Real Estate Capital Partners paid Denver-based The Nichols Partnership $56.4 million for the 157,914 sq. ft. headquarters of mutual fund company Janus Capital Group, according to CoStar Group. Nichols completed construction of the building just two years earlier for $40 million. The price of $357 per sq. ft. shattered previous Denver records by more than $100 per sq. ft., partly because Janus had just signed a 15-year lease.

Retail Outpaces Jobs

Developers have launched the construction of millions of square feet of new retail space in the Denver area despite tepid job growth and retail sales that only recently perked up.

Much of the new building is focused on the metro area's northern end, which has seen more residential construction of late than the area's southern suburbs, which boomed in the '80s and '90s. At the end of 2004, the retail vacancy rate in Denver stood at 6.3%, down from 6.7% a year earlier, according to CB Richard Ellis. That compares to a high of 15.9% in 1989 and a low of 5.4% in 1998.

Asking lease rates in Denver registered $14.94 per sq. ft. triple net for the fourth quarter, an increase of roughly $1 from 2003, and well above the $11.23 per sq. ft. average rate in 1998.

As in other industries, Colorado's retail industry suffered job losses from 2001 to 2003. Last year brought a respite as the state's retail sales rebounded to growth rates of 5.5% to 6%, CU economist Wobbekind says.

Driving most of the sales growth was a boost in per-capita income buoyed by the slowly improving economy. Developers launched construction of 1.9 million sq. ft. of retail space by the end of last year, and the Denver Pavilions, a 305,000 sq. ft. entertainment and retail complex, showcases the successful build-up as a popular retail hot spot over the last five years.

The square retail footage added in 2004 roughly amounts to a 3% increase in the market's 60.2 million sq. ft. total. Net absorption amounted to 1.9 million sq. ft. last year, as compared to just 210,000 sq. ft. in 2003 and 2 million sq. ft. in 2002.

Much of Denver's new retail space will arrive in massive chunks. Forest City intends to complete its 1.1 million sq. ft. NorthField regional shopping center — anchored by SuperTarget and Bass Pro Shops — at Stapleton in northeast Denver this fall. In the metro area's northern end, Forest City also plans to begin construction in April on the 1 million sq. ft. Orchard at Westminster anchored by Foley's and JC Penney. In Lakewood, Continuum Partners' ongoing $700 million redevelopment of the 100-acre site of the former Villa Italia Mall envisions 2 million sq. ft. of retail and office and 1,300 multifamily units over five to seven years.

Why so much construction when job growth has yet to justify it? Steve Markey, a senior associate at CB Richard Ellis, says that low interest rates and an influx of out-of-state residents are spurring retail construction. “As long as houses continue to be built and occupied, it creates the perceived demand for more retail,” Markey says. That won't sustain the market for much longer, CU's Wobbekind warns. “The growth in 2004 appears to be the result of per-capita income and the limited job growth,” he says. “This year and beyond will require more consistent job growth.”

Convention Hotels Spark

Denver's hotel market continues a slow, steady recovery from the industry's national 9/11 swoon, with Denver occupancy rates inching higher and average room rates stalling in the past two years.

Yet a boost is on the way. In December, Denver opened its newly expanded Colorado Convention Center, which doubled in size to 2.2 million sq. ft. This fall, the city plans to open an adjacent, 1,100-room Hyatt convention center headquarters hotel. Subsequently, developers plan half a dozen hotels totaling more than 600 rooms within blocks of the Hyatt.

The Colorado Hotel & Lodging Association pegged the 2004 occupancy rate at 63.2%, up 2% from the previous year. Prior to that, occupancy languished around 61% in 2001 and 2002. It was a far cry from the lofty 68% to 72% occupancy rates of 1993 to 2000. Meanwhile, average room rates hovered between $84 and $85 in 2003 and 2004, down from the high $80s and low $90s of 1998 to 2002.

John Montgomery, managing director of the Denver office of Horwath Hospitality & Leisure, says the doldrums of Denver's hotel market since 2001 are much like those seen nationally. It will take a while for market data to register the impact of the convention center and the adjacent Hyatt, he says.

“The overall occupancy rates are going to be relatively flat for a couple of years,” Montgomery says. “We're going to have significant additional demand entering the marketplace. With additional supply (as well), it will keep those occupancy rates down until we absorb the new rooms.”

The Metro Denver Convention & Visitors Bureau estimates the expanded convention center will land an extra $110 million in business annually beyond what its predecessor recorded.

Denver voters financed the $310.7 million expansion mostly by hiking the lodger's tax in Denver to 13.55%. This year, the metro convention bureau might ask voters to further boost the lodger's tax to pay for marketing of the center.

Across the street from the convention center, the Hyatt is slated to open in December. The city intends to use the hotel's profits to pay for the $373 million in revenue bonds sold to finance construction. Of the Denver market's 37,000 hotel rooms, 5,300 are downtown.

“Denver is really on a launching pad, ready to really do some pretty dramatic things,” Horwath's Montgomery predicts.

Rocky Gains for Multifamily

Apartment vacancy rates in Denver improved by nearly a percentage point last year and by nearly two percentage points since 2002. Yet, average rents have remained mired in the same tight range since 2001.

The quarterly Denver Area Apartment Vacancy and Rent Survey found a 10% vacancy rate among more than 103,000 apartment units surveyed in the fourth quarter, down from 10.9% in 2003 and 11.7% in 2002. None came close to the pre-bust 2001 rate of 8.7%. The average asking rent, meanwhile, landed at $821.68 in last year's fourth quarter, only seven cents higher than in 2001, according to the survey.

“We're still seeing average vacancy rates around 10% and dropping,” says Jeff Kimef, regional vice president of Denver-based Apartment Investment & Management Co. (AIMCO), an apartment REIT. “We're attributing that to a significant slowdown in new construction starts and a very gradual recovery in jobs.” AIMCO owns almost 1,550 apartment communities, including 11 in Denver.

The apartment survey confirms a construction slowdown. The 277,228-unit market added just 447 new units in the fourth quarter. Key factors behind the construction slump include low interest rates for homebuyers and the weak job market of recent years.

Data compiled by Marcus & Millichap provides a different view of the apartment survey. The firm predicts construction of 2,000 new units this year, down from 3,000 last year. It foresees a 1% drop in the vacancy rate this year and a rise in asking rents of less than 1%.

Disciplined Industrial

As Queen City of the Plains, Denver lacks the proximity to major population centers needed for a large warehouse market. However, geography also makes Denver a preferred warehouse and distribution point in its region for national companies — just on a smaller scale than in cities such as Chicago.

“Denver, on the ownership side, is a very popular place for national industrial investors to own buildings,” says Jim Bolt, a CB Richard Ellis broker specializing in industrial properties. “That's partly because we have a very strong national tenant base.”

Direct vacancy rates for Denver's 200 million sq. ft. of flex-industrial space registered 4.3% in the fourth quarter, down from 5% a year earlier. That's close to the 4.2% vacancy rate during the boom in 1998.

At its worst, the market's vacancy rate hit nearly 14% in 1988. Asking rents were $4.84 per sq. ft. triple net in the fourth quarter, exactly a dollar below their high in1998 when the economy was humming.

A small group of prominent national developers, including Lowe Enterprises, Catellus Development Corp. and Denver-based ProLogis Corp., hold most of the developable industrial land in and around Denver. That results in a “disciplined delivery” of new industrial construction in the market, Bolt says.

The strongest industrial markets are in Denver's transportation-focused northeast corridor, specifically along Interstate 70 between downtown and the airport.

Bolt predicts industrial asking rents will rise by 2% to 4% this year as the economy continues to recover. ProLogis vice president Wayne Barrett, whose company owns and operates 290 million sq. ft. of industrial space globally, was less optimistic. “I think we're on the road to recovery” in Denver, Barrett says. “But, I think it's going to take a little more time before you see more rent growth.”

Kris Hudson writes for The Denver Post.



2.4 million


5.2% (MSA)

Source: Metro Denver Economic Development Corp.


  1. Qwest Communications International
    11,100 employees

  2. King Soopers Inc.
    10,290 employees

  3. Wal-Mart
    7,841 employees

Source: Qwest, King Soopers and Wal-Mart



17.9% vacancy, 4Q 2004

17.1% vacancy, 4Q 2003

Rent per sq. ft.: $15.18 4Q 2004

Source: CB Richard Ellis


10.9% occupancy, 4Q 2004

10% occupancy, 4Q 2003

Rent per sq. ft.: $821.68 2004 avg.

Source: Denver Area Apartment Vacancy and Rent Survey


6.7% vacancy, 4Q 2004

6.3% vacancy, 4Q 2003

Rent per sq. ft.: $14.94 4Q 2004

Source: CB Richard Ellis


5.0% vacancy, 4Q 2004

4.3% vacancy, 4Q 2003

Rent per sq. ft.: $4.84 4Q 2004

Source: CB Richard Ellis


63.2% occupancy, Oct. 31,2004

61.2% occupancy, Oct. 31,2003

Average daily rate: $84.24 4Q 2004

Source: Colorado Hotel & Lodging Association


Stapleton, redevelopment of 3,000 acres at the site of the former international airport, calling for 8,000 single-family homes, 4,000 apartment units, 2 million sq. ft. of retail, 1,000 acres of parks and up to 10 million sq. ft. of office.

Estimated build-out value: $4 billion

Developer: Cleveland-based Forest City Enterprises.

Completion: Summer 2016

Belmar, redevelopment of the 103-acre site of the former Villa Italia Mall in Lakewood, including 1 million sq. ft. of office, 1 million sq. ft. of retail and 1,300 multifamily units.

Cost: $700 million

Developer: Denver-based Continuum Partners.

Completion: 2011

Hyatt Regency convention headquarters hotel, an 1,100-room, 37-story hotel adjacent to the newly expanded Colorado Convention Center in downtown Denver.

Cost: $374 million in revenue bonds to be repaid with hotel's profits.

Developer: Faulkner USA

Completion: December 2005

Massive Redevelopment Under Way at the Old Stapleton International Airport

Imagine a $4 billion redevelopment project equal to one-third of the entire land mass of Manhattan. That's what Denver envisions on 3,000 acres at the site of the former Stapleton Airport, roughly 20 miles east of Denver International Airport (DIA).

The Stapleton project will feature 8,000 single-family homes, 4,000 multifamily units, more than 2 million sq. ft. of retail and up to 10 million sq. ft. of office space when it's completed in the next 10 to 15 years.

Developer Forest City Enterprises of Cleveland accepted the Herculean task when it began construction at Stapleton in May 2001. So far, nearly 1 million sq. ft. of retail has surfaced at the site in northeast Denver, and families have moved into 1,300 homes.

In total, Forest City agreed to pay $79.4 million for 2,935 acres at Stapleton and to pitch in $44 million for construction of parks there. The pact with Denver requires Forest City to buy 500 acres every five years at the set price.

The balance of the Stapleton site's 5,000 acres will host 1,116 acres of open space, a mixed-use development by San Francisco-based Catellus Development Corp., and Noble/Sysco Food Services Co.'s 500,000 sq. ft. distribution center.

“Single-family home development remains very hot,” states Stapleton spokesman Tom Gleason. “We think Stapleton's position just minutes from downtown and close to DIA will bring the office market back sooner here.”

That's a tall order. The Denver-area office market bears a 17% direct vacancy rate. So far, less than 40,000 sq. ft. of office space has sprouted at Stapleton. And development of Stapleton's 200-acre biotechnology park just north of Interstate 70 remains conceptual.

Retail is a different story. The Denver Urban Renewal Authority issued $275 million in bonds last year to finance construction of major infrastructure at Stapleton, including roads, sewer lines and parks. Those bonds will be paid off with sales tax generated by Stapleton's 2.2 million sq. ft. of retail.

Already open at Stapleton are two retail centers that include grocer King Soopers, Wal-Mart and Home Depot. North of I-70, Stapleton's 1.2 million sq. ft. NorthField regional shopping center is expected to open in the fall. Anchoring NorthField are Bass Pro Shops, Super Target and Foley's, among others.
— Kris Hudson

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