January 23, 2008 4:55 PM
Ethan Reed: Denver to weather financial turmoil
The problem with any report on the commercial real estate market is that no matter how good the information is, it is always a case of looking into the rear view mirror.
It's important to have that information, of course, to see how the market is performing and where it likely is heading.
But I wanted to get some real time insight into the market, given the recent events, as illustrated by today's amazing turn around in the stock market, and the huge drop Tuesday after the Fed reduced its short term rates by three quarters of a point.
So I asked Ethan Reed, the marketing and research manager for CB Richard Ellis to send me his analysis of the Denver market.
Reed, a go-to guy for commercial real estate data, is bullish on Denver, but not a Pollyanna.
"The fact is, we sometimes make more money when there's doom and gloom than when there are sunny skies," he told me.
That makes sense.
If you live in Hawaii, you probably don't need a weatherman to tell you it's going to be a nice day.
It's a little trickier in a state like Colorado, where on some days you can ski in Vail in the morning and golf in Denver that afternoon, while on other days you're unexpectedly stuck on I-70 for hours, praying you have enough gas to make it to a station.
Well, enough of my tortured metaphor.
Here's Reed's report
By Ethan Reed
Special to the Rocky Mountain News
Commercial real estate has been cited as a primary driver of the Denver area economy.
Industry experts have also been attempting to make the case that the commercial markets are not directly linked to the sub-prime lending meltdown or residential foreclosure rate.
However, economic troubles are now not just limited to the housing and mortgage-related sectors, with reports repeatedly announcing earnings losses from companies in a variety of industries and stocks plunging across all major exchanges globally.
Many have been wondering how the recent broader economic troubles – nationally and globally- will effect commercial real estate fundamentals.
In Denver, the impact to the commercial real estate markets has been minimal.
Last year, the office and industrial markets experienced some of the strongest demand levels in years, with historically low vacancy and strong rent growth.
The credit-crunch has certainly impacted some investment sales, though sales transaction volume remained near the record high levels of 2006. New construction projects have also been affected, with some plans put on hold until more favorable financing could be arranged.
However, the only significant impact felt by the housing downturn and subsequent credit-crunch was in the retail sector which experienced virtually flat absorption (change in occupancy) during the year. Nevertheless, the Denver retail market remains near equilibrium at only 6.4% vacancy.
For the past six months, analysts have been pointing to other economic drivers such as corporate earnings, job growth and rising incomes as sufficient stimulus to drive the expanding local (and national) commercial real estate markets.
Unfortunately, the latest round of economic news appears to be indicating some weaknesses in these drivers as well.
With corporations suffering setbacks in earnings and dips in stock prices, they will be less likely to launch major expansions bringing more jobs and demand for office, retail and industrial space.
However, Denver has two advantages facing these economic challenges. The first is related to Denver’s industry mix.
Our economy is much more diverse than even seven years ago when our tech-heavy office sector took a hit during the dot.com bust.
Not only do we have many industries exhibiting growth to balance the few that may be struggling, but also one of our core industry sectors- energy- is projecting sustained growth for years to come, which also provides stimulus to our financial services sector.
In addition, Denver is in the unique position in which our market could actually benefit from an economic downturn in some cases.
One of the reasons why investors find the Denver market so attractive is that it is much less risky than other markets.
Being a top Tier II or low Tier I market, Denver has the amenities and infrastructure to attract businesses, retailers and residents.
However, it remains far more affordable than the coastal markets and regional competing markets such as Phoenix
As economics improve, Denver benefits from a “flight to quality” as companies and households look to relocate from smaller markets to Denver which is viewed as having superior amenities, natural resources and public infrastructure.
However, as companies suffer financial challenges and need to cut costs, Denver is a natural low-cost alternative to many pricier coastal markets and could see renewed interest in companies looking to relocate to Denver as a cost-savings strategy.
Regardless, the waters will be choppy in 2008, requiring sophisticated analysis and educated decision making for landlords, developers and businesses to succeed.
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