Despite Solid Fundamentals, Denver CRE Professionals Say Market Faces Headwinds In 2023
Denver’s commercial real estate market will face significant headwinds from regulatory pressures and economic forces in 2023 as the city elects new leadership and copes with broadening financial turbulence that is proving to have an outsized impact on CRE.
Higher interest rates, persistent inflation and Denver’s increasing slate of government regulations are among the primary concerns expressed by panelists at Bisnow’s Denver 2023 Forecast and Capital Markets outlook event Tuesday at the DC Building.
Denver will elect a new mayor in April along with multiple seats on the city council. The bankers, developers and investors who attended the forum said the new administration should work with businesses to solve issues like Denver’s lower-than-normal foot traffic downtown and the swath of empty offices in the city’s commercial corridors.
“We have an opportunity with the upcoming election to really change the story of downtown Denver,” Alpine Bank Regional President Matt Teeter said.
Downtown Denver was significantly impacted by the pandemic as remote work proliferated and fewer employees traveled to offices. Data from the Downtown Denver Partnership shows that downtown foot traffic is down about 11% from pre-pandemic levels, and about half of downtown workers have returned to their offices.
Furthermore, Denver’s offices have a nearly 22% vacancy rate, which is one of the highest among large cities in the Western U.S., according to Cushman & Wakefield’s Q4 2022 office report. That rate represents a 1.9% increase compared to Q4 2021 and is illustrative of how the “ongoing debate surrounding return-to-office continues to impact the office leasing market,” the report says.
Unico Colorado Market Leader Billy Woodward said local CEOs should start requiring their employees to return to the office, which could help spur spending at local businesses and improve the viability of downtown commercial spaces.
“I understand that there was a paradigm shift that happened during the pandemic and we’re never going back to the way it was before,” Woodward said. “Even so, we still need offices to create that sense of community that we lost when Covid hit.”
Makers Line President Tim Foster said Denver’s multifamily and industrial sectors are still fundamentally strong because there is such low inventory. The National Association of Realtors rated both of these sectors as “stronger than nationwide” in its Q3 2022 report, the most recent available.
One area where Denver’s next mayor has an opportunity to improve the city’s commercial real estate market is to make it easier for developers to do adaptive reuse projects, Foster said. This includes streamlining the permitting process for these projects and simplifying the city’s building codes to reduce the cost of construction.
“We really need Denver’s next mayor to push politics to the side and lean into adaptive reuse,” Foster said.
On the capital markets side, industry leaders said financing new deals will be challenging in 2023 because high interest rates are compressing the profitability of many commercial projects. Those issues could normalize in 2024, depending on how aggressively the Federal Reserve decides to raise rates to fight inflation.
“The market fundamentals are still very strong,” Bow River Capital Managing Director Patrick Bladsell said. “Buyers need to believe in the asset they’re purchasing, and sellers need to continue to believe in the deals they agree to.”
The office sector faces the most challenges going forward, according to professor Glenn Mueller, who teaches real estate courses at the University of Denver. One issue is that the workweek is slowly changing from a five-day week to a four-day week. That is occurring as offices are seeing less foot traffic and office rents are falling.
“Ultimately, time should heal any challenges in the market,” Four Mile Capital founding partner Chris Greer said. “How much time remains to be seen.”
