June 7, 2024
Denver’s regulations regarding development are holding back investment into the city, especially in a gloomy economic environment, developers said at Bisnow’s Mile High Construction and Development event June 5.
“It’s no secret that capital markets have been very constrained,” said Mark Beal, vice president of construction operations at Ryan Cos. “We have been increasingly selective about where we are spending that money. And it’s been more and more evident that Denver is not going to be our first choice, just because of what we’ve experienced during the execution phase.”
Bisnow/Bruce Kennedy
Kenai Capital Advisors’ Jules Sherwood, AC Development’s Dan Cohen, McWhinney’s Kristy Greer, Broe Real Estate Development Group’s Dean Brown, Quarterra Group’s Nick Russell and Ryan Cos.’ Mark Beal
What Beal called “legislative unpredictability” is slowing projects down and adding expenses that keep projects from kicking off, panelists said at the event at Mile High Station in downtown.
“If you layer in the linkage fees, if you layer in the Energize Denver impacts and you layer in the Green Buildings Ordinance, a lot of those extra costs don’t make the yield good,” Mortenson Vice President of Development Taber Sweet said. “Investors have a return threshold. If you can’t reasonably meet that return threshold, you’re not getting development.”
Meeting that return has been tough in recent years as expenses compounded.
“The last two years have been terrible with construction costs and interest rates,” Central Development Properties principal Jeremy Records said.
The worst of it may be behind the industry. Nonresidential construction costs remained relatively flat for Denver in the first quarter, according to the Mortenson Quarterly Cost Index. The report was cautiously optimistic about the sector’s overall outlook, despite “a stubborn inflation rate” that is stalling the interest rate cuts needed to prompt new project investments.
However, Sweet said that despite “the popular consensus, the desperate hope” that interest rates will go down, he thinks the industry needs to think about returns in a different way.
“I think the question isn’t when are interest rates coming down,” he said. “I think the new question is, how are you going to do business in a high interest rate environment? What does that mean?”
Bisnow/Bruce Kennedy
CBRE’s Jon Weisiger, Denver Community Planning and Development’s Manish Kumar, Denver City Council Member Flor Alvidrez, Mortenson’s Taber Sweet and Central Development’s Jeremy Records
For most developers, it has meant doing nothing, even when other fundamentals may point to demand for new product.
“I’m seeing very little speculative development going on, especially with the retail side, even when retail is a strong activity,” CBRE Senior Vice President Jon Weisiger said. “The numbers are a little tight.”
Building permits are down about 30% from last year and 40% from two years ago, according to Manish Kumar, executive director at Denver Community Planning and Development.
“And we do acknowledge that we haven’t been the most responsive for the last couple of years,” Kumar said.
Kumar said CPD is working to clarify its permitting process, updating its work charts and raising its commercial evaluation thresholds to keep up with inflation while looking at new processes and procedures to make communication with its customers as seamless and efficient as possible.
Council Member Flor Alvidrez, who represents Denver’s District 7, said the city council has prioritized transparency and is creating an online platform that will enable interested parties to search permits and their status.
Alvidrez said that while many of the city’s development policies were created with good intentions, the long-term implications of those regulations remain uncertain.
“There is ongoing litigation which could help us understand where it is failing and where the challenges are,” she said, apparently referring to a lawsuit filed in late April in federal court by NAIOP Colorado, the Colorado Apartment Association, the Apartment Association of Metro Denver and the Colorado Hotel and Lodging Association.
That lawsuit challenges the legality of the building performance mandates found in Energize Denver and in the state’s Air Quality Commission’s Regulation 28.
