Downtown Real Estate...

For Immediate Release On: 2/21/2009

For Further Information, Please Contact:
John Rebchook - Rocky Mountain News at rebchookj@RockyMountainNews.com

Relevant Info on the Web: http://www.rockymountainnews.com/news/2009/feb/21/downtown-real-estate-engine-sputtering/

Two years ago, downtown Denver real estate was firing on all cylinders.

Condominium units were flying off the shelf at the Glass House, buyers were lining up to own units at the partially built One Lincoln Park, the first new high-rise condo tower downtown in about a quarter of a century. If you could "fog a mirror," as one person put it, lenders were eager to give you a loan.

In addition, construction began on three groundbreaking projects - the 41-story, 503-unit Spire condo project; the $350 million, 45-story, 102-unit Four Seasons Hotel & Private Residences Denver; and the 25 units in the Ritz-Carlton Denver hotel, formerly the Embassy Suites.

Together, they add 630 units to the market, a 45 percent increase in the supply of "for sale" properties in the central business district.

And the residential market wasn't the only one buzzing.

In 2007, office lease rates were enjoying double-digit gains, space was tight, and ground was broken on several speculative office buildings. Talk heated up about the possibility of developing the long-awaited Two Tabor tower.

Fast forward to the present - and the downtown real estate engine is sputtering, burdened by the overbuilding of the past several years.

Vacancy trickling to Denver

While nowhere near the dire straits seen in Las Vegas or Detroit - with hulking empty buildings and neighborhoods - clearly downtown Denver isn't as healthy as it was several years ago.

"It feels ugly," said Tom Lee, a longtime broker at Frederick Ross Co.

"But the market hasn't fallen off the cliff," Lee quickly adds. "We don't have a 30 percent office vacancy rate like we did in the late '80s. It's not even as bad as it was in 2002," following the terrorist attacks in 2001 and the tech wreck.

Still, the overall office vacancy rate downtown rose 40 percent to 14 percent at the end of 2008 from a year earlier. The amount of subleased space downtown has doubled and is expected to continue to grow, as downtown employers lay off workers.

Lease rates likely will drop 10 percent this year from 2008, Lee said, and don't look for construction to start anytime soon on Two Tabor, or even the two 150,000-square-foot office buildings that were going to be constructed next to the Pepsi Center. They were announced with great fanfare two years ago by Kroenke Sports Enterprises.

"Nothing is going to start that isn't already under way," Lee said.

The tenant demand isn't there for new projects and given the shattered credit markets, financing isn't available without massive pre-leasing.

Still, the commercial market is in better shape than residential, both for "for sale" and rental.

All eyes on the Glass House

The appeal of downtown living is as strong as ever, said Ken Schroeppel, urban planner and author of the blog Denverinfill.com.

"The issue, quite simply, is that developers are trying to close on units during the worst economic crisis since the Great Depression, so naturally sales are going to be a bit slow," Schroeppel said.

The downtown condo market has been hit by a triple whammy: new buildings opening during a sluggish overall market; lenders unwilling to make condo loans, especially for investors and second-home buyers; and the premiums paid for jumbo loans, which are more than $417,000.

Some lenders are requiring a 40 percent down payment on jumbo condo loans, said Al Sanchez, an owner of Capital Access Mortgage. And many lenders simply refuse to make loans to condo investors, he said.

When One Lincoln Park was opening last fall, the owners were crowing that 144 of the 180 units had been sold, despite the tough market.

But during the five months since the first units were completed, public records show only about a third of the units have closed, with total sales tallying about $30.5 million. That equates to an average price of about $610,000.

"But that is misleading," said Deviree Vallejo, of Kentwood City Properties, one of the brokers listing the building at Lincoln Street and East 20th Avenue.

Vallejo said about another 65 of the original buyers are in some stage of closing - it is just taking longer than expected. In addition, Kentwood City Properties has placed another five units under contract in the past few weeks, and interest is strong, as the market heads into the beginning of the selling season.

"We have so much traffic on weekends that we're thinking about doubling up on our brokers here," she said.

Lydia Lin, owner of One Realty, said she has also been experiencing a recent surge in downtown sales activity. She said it is being driven by sellers willing to deal, low interest rates and the stimulus package, which provides an $8,000 tax credit for first-time home buyers.

"There's so much action now, it's unreal," Lin said. "Everyone is slamming."

But everyone is watching the 41-story, 503-unit Spire that is scheduled to open in December. Sales kick off next month.

There are about 1,400 condo units in the central business district, so the Spire would increase the supply by 36 percent.

"A lot of people are waiting to see what the Spire does," said Brian Phetteplace, manager of retail and residential development for the Downtown Denver Partnership.

He noted that 60 percent of the units are expected to be priced under $400,000, which should help sales.

"It's the highest density residential property downtown has ever seen," Phetteplace said.

Whether Spire will shoot the lights out like Glass House did or stagger under the weight of so many units hitting the market at once "is a mystery," said Denver developer Paul Stann.

"Everyone is trying to look into the crystal ball and figure the Spire out," Stann said. "I can't make any predictions. I hope it does well; that would be good for everybody. But I'm a pragmatist."

Rental market not immune

The rental market downtown also is softening.

The apartment vacancy rate more than doubled to 7.6 percent at the end of last year compared with 3.6 percent at the beginning of the year.

There are 2,664 rental units in downtown, and several large projects are under way or recently opened at the edge of the central business district - such as the Golden Triangle and Ball Park - that will increase the supply by about a third.

"The rental units are taking a pretty big swing, a pretty big increase," said Phetteplace, of the Downtown Denver Partnership.

Downtown apartments had been leading the Denver area for most of the past five years, said Jeff Hawks, co-owner of Apartment Realty Advisors.

"It had the largest rent increases and the highest occupancies," Hawks said. "Over the last six months, it has been hit the hardest as far as percentage changes."

Hawks said that in an economic downturn such as this one, "one of the first casualties are the corporate units," which are geared toward business people from outside Denver living for extended stays in apartments. That market has just about evaporated, he said.

Office, residential space at a glance

Condos

Existing units: About 1,400

Major project under construction:

* 1. 503 units at the Spire

* 2. 102 units at Four Seasons

Apartments:

Existing units: 2,664 units

Under construction or recently opened:

* 3. 2101 on Market, 226 units

* 4. Acoma Tower, 816 Acoma St., 226 units

* 5. Alexin Prospect Park, 2901 Inca St., 400 units

* 6. Park Avenue Lofts, 755 E. 19th Ave., 194 units

Office space

Vacancy rate Absorption* Median rental per sq. ft. Sublease vacancy

* 2008 14.03% (137,162 sf) $27 1.54%

* 2007 10.11% 704,422 sf $27 0.65%

About Trenka & Associates: Trenka & Associates is one of Downtown Denver's leading Real Estate Companies. http://www.condosandlofts.com

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