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Denver Developers Have Capital But Contend With Economic Challenges

Cyberbacker Executive Business Coach Jacob Clendenning, Evergreen Managing Principal Tyler Carlson, Mill Creek Residential Senior Managing Director Scott Makee, Milender White Vice President Albus Brooks, Wipfli Partner Damian Ederhoff, Mortenson Director of Business Development Brian Holland, Pennybacker Capital Managing Director Pat Rippe

High demand and economic uncertainty are converging on Denver-area development and construction companies trying to keep up with the needs of a swelling city while macroeconomic factors throw up hurdles.

Money is flowing into Denver because of the city’s rapid growth, but it takes more than financing to get a project done in today’s uncertain climate, according to panelists at Bisnow Denver Construction and Development event at Industry RiNo Station on July 19.

“There is just a ton of money and capital to support some of the projects that we’re doing, particularly in multifamily,” said Milender White Executive Vice President Albus Brooks, also a former Denver city council member. 

City-conducted studies of the housing market in Denver show the need for 50,000 housing units this year alone to meet demand, Brooks said. This kind of pent-up demand keeps developers interested in the area in spite of economic challenges.

Those challenges continue to pile up, with inflation, interest rates, labor shortages and supply chain delays all converging on the construction industry as it tries to keep up with busy markets like Denver.

All of these factors show up in rising construction costs, which are present across the board in U.S. development. 

Mortenson Director of Business Development Brian Holland said that his company’s second-quarter cost index for Denver showed increases of 2.3%, on top of first-quarter increases of 3.2%.  

“Our annual increase in normal times is 3%, so this year will probably look like 10%,” he said. 

He cited the impacts of Russia’s invasion of Ukraine and a related increase in aluminum costs in the last quarter amounting to roughly 14%.

The cost increases are difficult for developers to stomach, but many are pushing ahead anyway because they want to secure Denver as a distribution node.  

One example is the 1M SF distribution facility that Dollar General wants to build in Aurora, he said. Last year, when planning work began on the project, the estimated project costs totaled $90M. Today, that figure is $130M. This number still works for the discount retailer because of consistent consumer spending for certain categories of goods, he said. 

With these increases playing havoc with pro formas, construction companies are placing more importance than ever on an efficient construction process, including permitting and contingency plans in the event of missing materials.

In general, the role of pre-construction has changed, panelists said.

“You're not just estimating drawings and turning it into bad news,” Holland said. “What you're doing is you're identifying areas of pretty substantial risk or capital commitment that's required of the investment team.” 

He provided an example of an $8M outlay of equity for materials on a project that’s not yet cleared city permitting, adding it was necessary due to material cost escalation.

Brooks said his experience in both government and the private sector has shown him that there is a huge chasm between the two because they don’t understand each other. 

Evergreen Development Managing Director Tyler Carlson added that city employees “are just trying to do their job” but that “the problem is there's not enough of them.”