Denver, the Mile High City, has emerged as a promising destination for commercial real estate investment. With its thriving economy, strategic location, diverse industries, and robust workforce, Denver offers a fertile ground for investors seeking lucrative opportunities. In this comprehensive guide, we'll delve into the factors that make Denver a hotbed for commercial real estate investment, explore key neighborhoods, delve into market trends, and provide invaluable tips to navigate this dynamic landscape successfully.
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The Denver Commercial Real Estate Landscape
Denver has solidified its position as a major destination for individuals, enterprises, and investors interested in commercial real estate ventures. This reputation is owed to its flourishing economy, a diverse range of industries, and a skilled labor pool. Situated at the heart of US, Denver benefits from its strategic geographical location, amplified by a well-established network of transportation infrastructure, making it an enticing nucleus for trade and business activities.
The city's pro-business climate and relatively affordable cost of living significantly have established its allure as a hub for firms and visionaries spanning sectors like aerospace, technology, and sustainable energy. With an educated workforce at its disposal, an energetic urban center, a burgeoning startup ecosystem, and a strong commitment to eco-friendly progress, Denver presents itself as a compelling landscape for commercial real estate endeavors.
Regional Insights for Denver
Over the past decade, Denver's metro area has seen robust population growth, with projections estimating 3.6M residents by 2030.
The city's vibrant culture and flourishing economy have attracted individuals from everywhere.
Denver has a housing market that is affordable relatively and the cost of living further has enhanced its appeal for those seeking relocation.
The metropolitan area houses over 2.9M individuals and includes major cities like Westminster, Arvada, Thornton, Lakewood, Aurora, and Denver.
With a population increase of nearly 19% in the past 12 years, Denver's median age is 37.3, slightly below the national average.
The city's $48,520 per capita income and $90, 716 median household income have exceeded the national average by 25 percent.
Vibrant Job Market in Denver
Denver has a diversified and thriving economy, fueled by both emerging and established industries.
While the energy industry, notably gas and oil, has been a historical driver of economic growth, Denver has witnessed the emergence of advanced financial services, biotechnology, and manufacturing in recent years. This diversification has played a role in forming a robust job market that presents ample prospects across a range of professional domains.
The Denver-Aurora-Lakewood region’s total GDP stands at an impressive $214.5B, marking a remarkable growth of over 42% in the past decade per St. Louis Federal Reserve data. Notably, the unemployment rate currently hovers at a near-historic low of 2.4% as of April 2023 (Bureau of Labor Statistics).
Denver's standing in the job market is bolstered by its recognition as one of the top cities for employment and a leading metropolitan hub for STEM professionals, as validated by WalletHub. Key industries in the region include software, healthcare, financial services, energy and natural resources, bioscience, and aerospace and aviation.
Among the noteworthy Fortune 500 companies based in Colorado are DCP Midstream, Liberty Media, Newmont, DaVita, DISH Network, and Arrow Electronics as reported by the Metro Denver Economic Development Corporation (EDC). Leading employers include UnitedGlobalCom, Agility, Qwest, Ing Security Life, and DaVita Kidney Care.
Education is a driving force in Denver, with prestigious institutions such as the University of Colorado Denver, the University of Denver, and the Colorado School of Mines, shaping the city's intellectual landscape. Notably, nearly half of Denver's residents possess a bachelor's degree or higher, exceeding the national average by approximately 1.4 times.
Denver's well-connected transportation infrastructure is anchored by key interstates like I-25, facilitating north-south travel to cities such as Albuquerque and Cheyenne. Additionally, I-70 provides a vital east-west corridor linking Denver to Salt Lake City and Kansas City, while I-76 extends northeastward toward Omaha.
The DIA or Denver International Airport stands as a pivotal hub for air travel, providing a comprehensive range of both domestic and international flights. Expanding the transportation network, the freight rail system operated by BNSF Railway and Union Pacific assumes a critical role in facilitating the seamless transportation of goods within the region and extending beyond its boundaries.
Industrial Market of Denver Q2 2023
A surge in Leasing Volume: Leasing activities in metro Denver surged impressively, resulting in a transaction volume surpassing 2.9 million sq. ft. This quarter-over-quarter escalation amounted to a remarkable 73.1% increase.
Positive Net Absorption: A notable 1.6 million sq. ft. of positive net absorption was recorded, propelling the cumulative year-to-date net absorption to exceed 2.4 million sq. ft.
A shift in Development Activity: Development activity experienced a quarter-over-quarter decline of 18.0%, with 8.2 million sq. ft. under construction at the close of Q2 2023.
Steady Asking Rent Growth: The growth of asking rents in metro Denver maintained stability, reflecting a nearly flat quarter-over-quarter increment of slightly less than 1.0%. The average stood at $8.78 per sq. ft. NNN (net-net-net).
Marginal Shift in Availability Rates: Availability rates observed a marginal rise of 30 basis points (bps), reaching 7.9%. Meanwhile, vacancy rates remained consistent at 6.7%.
Sales Activity Amidst Uncertainty: As the landscape of economic certainty remains uncertain and capital markets continue to exhibit volatility, sales activity took a dip yet again in Q2 2023. The overall sales volume amounted to $98.0 million.
Office Market of Denver Q2 2023
Sublease Availability Reversal: After achieving unprecedented heights in the last three quarters, sublease availability experienced a 3.2% quarter-over-quarter decline, settling at 6.4 million sq. ft.
Development Pipeline Update: The development pipeline maintained its standing at 2.4 million sq. ft. This period saw the unveiling of Credit Union of Colorado's new 106,500 sq. ft. headquarters and the initiation of construction for Mortenson's 65,000-sq.-ft. office in River North.
Positive Direction in Net Absorption: In Q2 2023, there was a significant improvement in direct net absorption, with negative 140,800 sq. ft. compared to the negative 384,600 sq. ft. reported in Q1 2023.
Leasing Activity Momentum: Leasing activity gained momentum in Q2 2023, registering a quarter-over-quarter surge of 22.4%. This level of activity closely mirrored the figures observed in the corresponding period of the previous year.
An uptick in Investment Activity: Investment activity demonstrated an upswing in Q2 2023, reaching a total of $253.6 million ($304.39 per sq. ft).
Vacancy Patterns: Total vacancy observed a 10 basis points (bps) quarter-over-quarter increase and a year-over-year surge of 120 bps, reaching 21.2%. Direct vacancy exhibited a similar quarterly increment of 10 bps, reaching 18.0%.
Asking Rent Fluctuations: The overall average direct asking rent displayed a minor quarter-over-quarter rise of 0.3%. However, on a year-over-year scale, it saw a modest decrease of 0.2%, settling at $32.11 per sq. ft FSG (Full Service Gross).
Retail Market of Denver Q2 2023
Positive Net Absorption Continues: A notable 145,000 sq. ft. of net absorption was documented in Q2 2023, marking the ninth consecutive quarter of positive net absorption.
Vacancy and Availability Shifts: Direct vacancy experienced a marginal 10 basis points (bps) increase quarter-over-quarter, reaching 6.2%. In contrast, availability saw a 10 bps reduction, also settling at 6.2%.
Consistent Asking Rents: Quarter-over-quarter, the average asking rent held steady at $19.77 per sq. ft. NNN (net-net-net), showing no change.
Growing Construction Pipeline: The construction pipeline achieved an impressive milestone, surpassing 410,000 sq. ft. in Q2 2023. The quarter witnessed the delivery of six projects, totaling just over 233,000 sq. ft., marking an 18.1% increase compared to the previous quarter.
Sales Volume Trends: The second quarter saw sales volume amounting to $153.4 million, indicating a moderate 8.1% decrease compared to the previous quarter.
Multifamily Market of Denver Q2 2023
Steady Occupancy: In Q2 2023, the overall occupancy rate remained consistent at 94.2%, mirroring the historical Q2 average from 2000 to 2019, which stood at 94.1%.
Rising Asking Rent: The average asking rent experienced an upward trajectory, reaching $1,904 per unit or $2.15 per square foot (sq. ft.). This marks an increase of approximately $36 per unit compared to the previous quarter, and a rise of $33 per unit on a year-over-year basis.
Sustained Development Activity: The momentum in development activity remains strong, with 36,000 units currently under construction, spanning 140 properties as of the end of Q2 2023.
Robust Deliveries: A notable 4,262 units were delivered in this quarter, propelling the total year-to-date deliveries to 5,914 units. This quarter's deliveries ranked as the second-highest ever recorded in a single quarter, second only to the total recorded in Q3 2021.
Positive Net Absorption: The net absorption for Q2 2023 stood at a positive 4,020 units, contributing to a year-to-date net absorption of 4,494 units. Impressively, Metro Denver claimed the third-highest Q2 2023 net absorption figure among all U.S. markets, trailing only New York and Orlando.
Transaction Volume Fluctuations: The transaction volume for Q2 2023 amounted to $462.8 million, signifying a substantial decline of 71.7% on a year-over-year basis. Notably, the average Q2 transaction volume over the past five years has hovered around $1.0 billion, highlighting the inherent fluctuations in the market.
Bottom Line
Denver's commercial real estate market beckons with promise. Its diverse economy, growing population, and various investment avenues create a vibrant canvas for investors to paint their success stories. Whether you're seeking stability through multi-family properties or high returns through industrial real estate, Denver offers a realm of possibilities.
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