Why A Bust Won't Follow The Denver Boom (But Maybe A Pause Will)
The conventional wisdom is that booms never end well for boomtime markets, but the Denver market seems set for a different outcome—most sectors, anyway. A pause will probably follow the boom, according to the speakers at our third annual Denver New Construction & Development event, and it isn't even clear that the boom's over anyway.
Mayor Michael Hancock kicked off the event with his opening remarks. As Denver roared out of the recession, he said, it set the pace for growth for the rest of the nation: the region created 60,000 jobs in the past five years, and in-migration has been strong—many of them talented Millennials. There's been $4.4B in real estate investments, adding 3.1M SF of office, 6,500 residential units and 2,500 hotel rooms to the market.
Upcycles don't last, however, the mayor said. But even so, Denver has a fair amount of momentum, which will help take it through the next part of the cycle better than most places, he said, with an economic diversity unimaginable in Denver only a few decades ago.
Denver has its problems, of course, the mayor added, with the increasing lack of affordable housing at the forefront. The city's first affordable housing fund is now in place, he said—arguing that the costs involved are well worth it—which will facilitate the construction 6,000 more affordable units.
Our construction and development speakers argued for a pause in the market, not a slump, and for sectors like multifamily and industrial, it isn't even time for a pause. There's still enough in-migration to support more apartment projects, for instance, though urban infill sites, especially those near transit nodes, are hard to find.
As for the industrial market, demand is strong, supporting a wave of spec developments. The speakers didn't expect that to slow down.
After years of lagging, retail tenants are expanding, improving retail market conditions. Developers are now at work on more new retail than before, which will do well, though some of the older properties will probably still struggle to stay leased. Experiential retail has more of a future than any other kind, especially as part of mixed-use, as it helps create distinctive places, the speakers said.
Land and construction costs are rising, and that's problematic, our speakers said, and not so different from a lot of markets. But unique to Colorado is its problem with the construction defects law, which poses a long-term threat to the health of the residential market. No one was sanguine that the legislature would get around to fixing the problem anytime soon.
Our multifamily speakers said development in the sector continues to be robust. And yet that in itself is something of a challenge. Lenders in particular are nervous, asking how long this can go on. But there's an argument to be made that, for market-rate projects at least, the answer is quite a while.
For one thing, people still want to be in Denver—there's a migration of talent to the area that isn't slowing down. Perhaps more importantly, the multifamily development since the end of the recession has been something of a catch-up. Except for the worst moments of the recession, which really didn't last long, demand for apartments has outpaced supply here for a good many years. So there's still a shortfall of units, which is driving rents. The increases might not be double-digit (that isn't sustainable anyway), but there will be growth ahead.
Mile High Development president George Thorn, LCP Development founder Jonathan Bush, and SW Development Group president Scott Yeates.
Financing remains the challenge in affordable housing—the subsidies are slim and land and construction costs are working against the sector. Also, there's stiff competition from other kinds of development, especially mixed-use, for infill locations close to transit and employment, which is exactly where affordable housing needs to be. Still, it's critical to the health of the overall local economy that affordable housing continues to be developed, something that the city has made clear.
Like the other panelists, our multifamily speakers weren't hopeful that the legislature would do anything about the construction defects law anytime soon. A few condo projects will be built soon anyway—the demand is such that some of the more daring developers are now willing to take the risk.
Metropolitan Capital Advisors principal Charley Babb, who moderated, Trammell Crow Residential managing director Matthew Schildt, and Brue Capital CEO Chad Brue.