Uncertainty Plagues Denver CRE, But Bright Spots Remain
When it comes to Denver’s CRE landscape at the end of 2022, we can only say one thing for sure: Nothing’s certain.
Panelists underscored that theme at Bisnow’s Nov. 16 Denver State of the Market event at Dierks Bentley’s Whiskey Row in the Ballpark neighborhood, focusing on unpredictability and upheaval across a range of factors. Interest rate fluctuations, price corrections, post-pandemic cultural changes, rising construction costs and supply chain crises have all played a role in creating a business climate where it can feel safer to wait and see than to commit money and resources.
“There's a lot of risk right now,” Focus Property Group CEO Bahman Shafa said. “It’s a very scary environment, in terms of starting a new project and starting a new development.”
“Volatility, market volatility and tenant demand — all of those things make it harder to predict what it’s going to be like to finish a project five years from now,” Urban Villages Inc. Chief Development Officer Jon Buerge said. “Construction costs are obviously a challenge. Financing is a challenge. All of those things on their own, we can get past them. But it's the combination of everything.”
Formativ CEO Sean Campbell likened the moment to solving a word problem with five undefined variables.
Soaring interest rates represent an especially tough challenge, especially as new, more costly rates may not yet be fully reflected in market costs, or factored into property tax assessments.
“My biggest fear is that the 2023 [property tax assessment] values are going to be high, because we hadn’t seen the impact of the interest rates yet,” Ryan principal Matt Poling said. “The first thing that happens is the spread between buy and sell increases.”
Still, some panelists identified opportunities, even amid the turmoil.
Castlewood Capital founder Michael Leahy sees great possibility in more affordably priced projects, the kind that improve housing accessibility in an expensive market like Denver.
“You're giving up some income, that’s kind of antithetical to us as real estate developers,” he said. “But consciously pricing your project so that it meets the needs of the ‘missing middle’ — and that's firefighters, teachers, folks who work at the county, middle managers at your company — that not only makes you feel good, because you're providing housing for people that need it, but I would argue that in this environment is actually the smartest strategy.”
There’s strong, perennial demand for developments aimed at the middle of the market, he argued, and these projects can also qualify for subsidies and incentives that mitigate risk.
“There's $150M of funding coming from the Department of Housing over the next year — grants for nonprofits, low-interest loans for for-profits, and infrastructure grants for municipalities,” he said. “One hundred fifty million dollars, and they've got to spend it.”
Tribe Development CEO Ashley Stiles also mentioned having success with government partnerships — in her case, at the city level. Tribe has been working with the city of Denver’s Department of Economic Development and Opportunity and the Downtown Denver Partnership to help first-time businesses open on the 16th Street Mall, which in recent years has been dominated by big national chains.
Several panelists mentioned life sciences as a continued ray of hope. And others described more creative solutions, or looking at more modest projects as a source of reliable growth. Good Investment Partners Managing Partner Ryan Good said self-storage had continued to be a strong segment.
As challenging as things have been, panelists seemed to acknowledge that other markets have struggled even more to a post-pandemic reality. Monfort Cos. Director Kenny Monfort praised Denver’s fundamentals, reminding the audience of its continued status as a destination for big companies and top talent.
“We’re very lucky to be in Denver,” he said.