Hope For Equilibrium: Denver CRE Leaders Share Predictions For 2024
2023 was a tumultuous year for commercial real estate in Denver.
High interest rates combined with elevated construction costs caused many developers to pause their projects. Investors also seemed keen to sit on the sidelines and wait for better deals to emerge as transaction volumes across all asset classes declined.
But some experts expect Denver’s fortunes to reverse in 2024 and beyond as the market finds a new sense of equilibrium, according to Matthews Real Estate Services First Vice President David Treadwell.
“Even though no one wants to officially say it, we've been in a recession for probably the last five quarters,” Treadwell said. “So from that standpoint, that affects pretty much all transactions. Obviously, there's a disconnect on value, but that doesn't mean things don't get done.”
With the year coming to a close, five Denver-based commercial real estate professionals shared their predictions for what 2024 could have in store for the market. Here’s what each of them saw when they looked into their crystal balls.
Andy Cullen: Office Tenants Will Take Advantage Of Downward Pressure On Market
Tension between office tenants and landlords seemingly peaked in 2023, Tributary Real Estate managing partner Andy Cullen told Bisnow. Landlords faced challenging economic conditions spurred by remote and hybrid work as many tenants decided to move out of their office spaces altogether to save on operational costs.
Next year, Cullen expects office tenants to take advantage of the tough year landlords faced in 2023 by extracting concessions ranging from lower rent to building improvements and maintenance.
“2024 is going to be one of the most exciting markets we’ve ever had,” Cullen said.
Cullen pointed to the recent lease negotiations between Boa and Zeppelin as an example of the concessions that tenants could aim for next year. Cullen said Zeppelin came to the table with new amenity upgrades and improvements to the park near Boa’s office in River North to keep the company as a tenant.
Boa signed a 10-year lease extension on 87K SF of office space at Zeppelin’s Taxi campus in mid-November to house the company’s global headquarters. Boa and Zeppelin have also teamed up to clean up the nearby South Platte River and to support the Colorado Village Collaborative, a nonprofit organization that runs Denver’s sanctioned campsites for people experiencing homelessness.
“Boa had a lot of options available to them when they signed this lease,” Cullen said. “But Zeppelin was able to give them something that was really important to their employees and for the environment.”
Deron Brown: Improved Development Demand Likely On The Way
A convergence of factors ranging from increased tourism to airport investments will help pull Denver developers out of the 2023 slump, according to PCL Construction Chief Operating Officer Deron Brown.
“Over the past year we saw landmark legislation unlock substantial funding for critical projects aimed at modernizing our nation's airports and enhancing our overall climate resilience,” Brown said. “Manufacturers are urgently moving to reshore operations to circumvent future supply chain disruptions. While a recession seemed all but certain in 2023, the country may have pulled off a ‘soft landing’ after all, boosting consumer spending and instilling confidence in entertainment developers.”
Denver’s tourism numbers rebounded to near pre-pandemic levels in 2022 as more than 36.3 million visitors came to the Mile High City, according to data from Visit Denver. The figures for 2023 are expected to show an increase when they are released in early 2024 since Denver secured large conferences like Psychedelic Science 2023, which drew an estimated 12,000 people to the city.
Denver has also spent millions to upgrade its airport, and the efforts were buoyed by a $25B infusion of federal funds. Airport officials are planning to add four new concourses and hundreds of new gates, and they expect to serve 100 million passengers by 2027, Denverite reported.
Dawn McCombs: Industrial Absorption Will Expand As Deliveries Increase
Denver industrial developers seemingly spent the entirety of 2023 adjusting to economic impacts from rising interest rates to persistent construction material inflation, according to Avison Young principal Dawn McCombs.
Now that the Federal Reserve has signaled it could begin cutting interest rates in 2024, McCombs said she expects Denver industrial developers to increase construction activity. In turn, that activity could increase the market’s industrial absorption rate, which has remained below 2.5% of inventory since Q1 2021, Avison Young data shows.
Developers delivered roughly 3.2M SF of industrial space in 2023 and McCombs said she expects that total to increase to 4.6M SF by the end of next year.
“By 2025, we should have absorbed all of that new construction,” McCombs added. “And then by the end of 2025 or maybe into 2026, we're going to have very low vacancy and will need new product to be delivered.”
One of the key areas of growth for Denver’s industrial market will be in spaces between 20K SF and 50K SF, which have become Denver’s bread and butter, according to McCombs. More than 2.1M SF of these properties was absorbed in 2023, Avison Young data shows. For comparison, only 1.3M SF of industrial properties smaller than 20K SF was absorbed this year.
Tobias Strohe: Hospitality Will Shine The Brightest In 2024
There was a lot of chatter about the strength of Denver’s multifamily market in 2023, but hospitality seems poised to take the reins in 2024, according to JNS Architecture and Interior Design partner Tobias Strohe.
Multifamily activity in Denver was largely boosted by the city’s new affordable housing requirements, which Strohe said forced many developers to rush their projects into the entitlement pipeline before the new requirements went into effect. This caused a crush of new multifamily delivery in 2023, but that trend is likely to fade as the market works to absorb all of the new units, Strohe said.
Strohe said the multifamily side of JNS’ business in Denver has already “fallen off a cliff.” But other markets across the country are seeing a steady increase in hospitality developments. This is partly due to increased demand for travel and hotel stays, Strohe said.
Denver could capitalize on increased demand for hospitality space if the city’s tourism numbers continue to increase, Strohe added. But there are other challenges the city still needs to navigate such as its high cost of living and above-average inflation.
“There’s a lot of possibility for hospitality properties in 2024, but it’s very location-specific,” Strohe said, pointing to projects like the National Western Center and Fox Park as two examples of places where hospitality operators want to be.
David Treadwell: Expectations Will Start To Align
If Treadwell could use just one word to describe 2023, it would be “mismatch.”
First, there were mismatched perceptions about the health of Denver’s commercial real estate market. Then, there were mismatched expectations between owners and developers over property values. But both of these issues seem likely to be ironed out in 2024 as new listings start to fall in line with economic conditions, Treadwell said.
This trend could provide a needed boost to commercial real estate transaction volumes.
“For a while there, the seller ask was a ridiculously low cap rate, and we were negative leverage because the best loan you could find might have been 6.5% to 7.5% on the multifamily side,” Treadwell said. “Now, I'm starting to see listings come out that are now more in line with where interest rates are, meaning they’re in the 7% to 7.5% range. And that's where we need to get to really see transaction volume start picking back up.”
Transaction volumes were down across the board in Denver during 2023. For example, CBRE found that multifamily transaction volumes declined 12.6% year-over-year to $1.1B in Q3, while office building sales dropped 63% and industrial property sales dropped 36% over the last 12 months.
Denver’s transaction volume could also be boosted by decreased development of multifamily properties, Treadwell said. He added that multifamily properties are oversupplied in Denver because developers rushed to get their projects into entitlement before Denver’s affordable housing regulations went into effect.
Treadwell said this activity suggests there will be a period where a lot of properties will be absorbed in 2024 while multifamily deliveries decline.
