Denver's Commercial Market Starts to Make a Recovery

By Maura Webber Sadovi
From

Denver's office and apartment sectors are pulling out of a slump that kept many building owners from enjoying the region's Rocky Mountain highs after the tech bust and the terrorist attacks of 2001.

The recovery has been driven in part by relatively steady job gains since 2004 and the strengthening energy, financial and professional-services sectors. Employment in the region rose 1.4% in September from the year-earlier month, though the total number of those employed still was below the region's previous high for the month, touched in 2000, according to the Bureau of Labor Statistics.

The improvements have come as the Denver area, home to about 2.4 million residents, is embarking on a $4.7 billion project called FasTracks, which will enlarge the region's mass-transit system by adding about 119 miles of rail lines, expanding bus service and revamping the historic Denver Union Station as the region's central transportation hub.

The commercial real-estate recovery is broad-based, but the improvements in the office and apartment sectors have been most evident. Formerly vacant office spaces have begun to fill up throughout the region, with the central business district one of the tightest submarkets in the second quarter and the northwest suburban submarket among the weakest due to the predominance of the struggling tech sector, according to Property & Portfolio Research Inc., a Boston real-estate research firm.

A three-year slide in apartment rents reversed midway through last year, and concessions such as free rent are beginning to shrink, PPR said. The retail sector, a relative bright spot in the Denver market, has seen vacancies tick down since the third quarter of 2004, even as construction has ramped up.

The turnaround story in the Mile High City, as Denver is known, has caught the attention of a number of investors, many of whom had shied away from the market's perceived volatility during the downturn. "There's a shared sense among everyone that Denver office is a rising market," says Sam DePizzol, managing director in Denver for real-estate services firm CB Richard Ellis, "so it makes sense to put investment dollars there."

Denver Union Station is set to become a central transportation hub, as part of an expansion of the city's mass-transit system.

The apartment market in Denver is gaining favor, despite higher prices. The average price paid per unit in the area, based on transactions valued at $5 million or above, rose to $100,289 for the first nine months of this year -- above the national average of $93,055 -- from $81,353 in 2004, which was just below the national level, according to Real Capital Analytics Inc., a New York research firm. In addition, about $1.4 billion in apartment complexes were snapped up in the Denver area last year, more than twice the $590 million in transactions tracked in 2004. In the first nine months of this year, acquisitions already have bested the 2005 full-year level, with an estimated $1.6 billion of apartments sold.

Unlike some markets in Florida, where conversions of apartments to condominiums have helped push down vacancy rates, strong demand and relatively low levels of new supply are behind the Denver market's improvement, PPR said, and the region's historic appeal to young adults in their prime apartment-renting years of 20 to 34 also bodes well going forward. The sector also will benefit from Denver's softening housing market, as some former owners forced from homes by foreclosure opt to rent, said Jeff Hawks, principal of Apartment Realty Advisors in Denver.

Some sellers have taken advantage of the improving market to exit Denver. In 2000,Mack-Cali Realty Corp., of Cranford, N.J., decided it would gain efficiencies by focusing its energies and portfolio in the Northeastern U.S., but the company has only recently found a buyer willing to pay an acceptable price for its Denver-area portfolio, says Mitchell Hersh, the company's chief executive. Mr. Hersh said Mack-Cali expects to close next month on the sale of 19 office buildings and some additional land for about $195.3 million in the Denver and Colorado Springs areas.

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