The dark clouds of economic uncertainty have begun to part over Denver, which has struggled in the economic slowdown. As the national economy begins to strengthen, many expect Denver to lag slightly. Still, signs of recovery have appeared in Denver’s apartment, office, industrial and retail markets, spurring a rise in investor demand and relieving vacancy pressures in a number of areas. An anticipated rebound in job creation this year, after 3 consecutive years of job losses, will allow local employers to hire more than 20,000 workers, boding well for all sectors.

Multifamily

The Mile High City apartment market will begin to see improvement as employment growth and declining construction activity allow vacancy rates to recede. Developers are expected to complete only 2,300 units, a 62 percent decline from 2003. However, net operating incomes will continue to slide — albeit at a slower rate — for an additional year. Apartment owners started to report an increase in tenant demand at the end of 2003, which kept vacancy rates from exceeding 12.2 percent. This year, vacancy will recede by 70 basis points to 11.5 percent. Asking rent is expected to decrease by 1 percent to $792 per month.

Investors will focus on hard-hit submarkets that are expected to exhibit improvement. Stabilization in the high-tech and telecommunications industries bodes well for the southeast metro and northwest metro submarkets. Apartment owners in the southeast metro submarket expect to see improvement in occupancy levels as local firms increase payrolls and the region remains a prime residential destination.

Northwest metro area apartment conditions should show slight improvement, as the return of business spending on technology equipment and services translates into increased hiring among the area’s technology-related firms. Intrepid investors are expected to overlook north Denver’s current lackluster multifamily fundamentals, which are projected to rebound later this year. Apartment demand in the area will be bolstered by young professionals who seek an urban lifestyle but are priced out of the area’s for-sale market. The submarket’s outlying neighborhoods, such as Highland Park, will offer investors opportunities not likely to be found in the Central Platte Valley, which is home to many of north Denver’s luxury units.

Investment activity is expected to increase this year as out-of-state capital continues to flow into the metro area. The Class A sector is likely to be the prime benefactor, with most of the out-of-town investors seeking the perceived safety of luxury properties. Investors will continue to seek Class C complexes located near primary employment centers and desirable neighborhoods, including Lakewood and central Denver.

Office

Economic uncertainty has begun to subside in the local office market as the Denver metro area received a boost to its corporate headquarters roster. Overall office market vacancy climbed 120 basis points in 2003, to 20.9 percent. This year, office employment growth and limited new construction of only 315,000 square feet will produce positive absorption. The Class A office market’s vacancy, which should start to show signs of improvement as the national and local economic engines rev up, peaked in 2003 at 25.7 percent, capping 14 consecutive quarters of increases. The Broomfield submarket, anchored by the Omni Interlocken Resort hotel, ended nearly 2 years of more than 30 percent vacancy as the area posted a slight 10-basis-point improvement in 2003, to 29.9 percent. The area will report better results this year as growing companies in Boulder, attracted by newer space at relative bargains, relocate their operations to Broomfield.

Investment activity remained brisk through 2003 despite the continued deterioration of office market fundamentals. Safety-minded investors are searching for properties with stabilized balance sheets, credit tenants and long-lease terms, while opportunistic buyers are seeking buildings with upside potential ahead of improving office employment prospects. The western suburbs provide a greater number of opportunities to purchase buildings with steady cash flows since the area lacks a high concentration of tech firms compared to the northwest and southeast corridors. The southeast corridor remains an investor favorite, with 700,000 square feet changing hands — a figure representing 25 percent of the space sold in the metro area during the first three quarters of 2003.

Industrial

Diversified among the service, tourism, domestic trade, high-tech, aerospace and government sectors, Denver’s economy provided support for industrial demand despite weak employment. The city’s industrial vacancy stayed shy of 9 percent during the market correction in 2002. Construction dropped from more than 4 million square feet in 1998 to less than 2 million square feet in 2002. Only 1 million square feet of industrial product is due to be built in 2004. Investors are favoring the Centennial and central/downtown submarkets, with vacancy in the central industrial market at less than 4 percent. The west side and northwest/Boulder submarkets have not performed as well due to limited accessibility to transportation systems and slack demand. The Denver International Airport/Montbello submarket has also maintained sub-5 percent vacancy.

Private and institutional buyers will remain active in the Denver industrial market. While only the nation’s 23rd largest industrial market, Denver ranks 18th in industrial REIT investment. Excellent geographic location and solid market fundamentals will continue to fuel industrial investment and drive sales price growth in the market. Even as vacancy has increased and rents have fallen, the median sales price for Denver industrial space has averaged more than 4 percent growth annually since 2000.

Retail

Denver’s retail sector will continue to outperform other commercial real estate investments in 2004. Buyers’ interest in single-tenant, net-lease properties and newer anchored shopping centers will drive the retail investment market. The metro area’s vacancy rate will improve during the year, and the return of economic growth will help retailers’ bottom lines, allowing owners to raise asking rents. Strong market performance will prompt several local and national developers to team up to start construction on many regional and super-regional projects in the metro area.

This year, owners can look forward to a 30 percent decline in construction activity to 2.3 million square feet of retail space, the lowest level since 1999. Vacancy rates will decrease by 40 basis points, to 7.7 percent, by year’s end. In-line space at grocery-anchored and shadow-anchored shopping centers with national and credit tenants will continue to be in high demand, as vacancy hovers around 5 percent. The average asking rent will continue to climb to $17.40 per square foot, up 1.8 percent from year-end 2003.

Last year, investors pushed the median price of multi-tenant retail properties up by 17 percent, to $118 per square foot, with cap rates remaining north of 9 percent. The southeast suburban and northwest metro submarkets will likely have less investor activity this year.

Adam Christofferson is the regional manager of Marcus & Millichap’s Denver office.

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