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Construction forecast.

Pick your prognostication: What will Denver's building market do?

Take one: The Denver metro real estate and construction markets are slowly sliding backward.

Ahem. Take two: The Denver market is looking forward to sustained growth in 1999.

Hold it. Let's try that again. Take three: Denver metro is looking forward to mixed prospects for the remainder of the year.

Predicting the future of property prices and investments, apartments and condos, industrial construction and all the rest is a little like choosing dinner from a Chinese menu: You can order up the future you like from column "A" and column "B," and at the end of the meal you get a fortune cookie.

Nevertheless, many distinguished real estate and construction prognosticators have delivered predictions for their respective markets in '99. Often those predictions are at odds with each other, depending on whether wishful thinking or cautious conservatism is the order of the day.

Case in point: Focus Colorado: Economic & Revenues Forecast, 1998-2004, a report issued last September by the Colorado Legislative Council, ran this bold black headline: "Construction Activity will Slow Dramatically in 1998."

Well, now we know better. (But, unlike most available forecasts, the council report at least analyzed statewide activity.)

With these caveats in mind, ColoradoBiz presents these Denver-area construction and real estate forecasts, a compilation of every forecast we could lay our hands on.

1998 set metro-area home sale and construction records that will be hard to match this year. The Denver Board of Realtors predicts more of the same for 1999 "thanks to a number of major developments on the drawing board in the City and County of Denver, and a healthy economy (albeit slower in 1999)," said a recent board report.

Early returns appeared to buttress that prediction. January 1999 home sales (the latest figures available) slumped slightly from the two preceding months', to aggregate dollar volume of about $514 million from more than $527 million in December. Seasonally adjusted, however, January was stronger than any month in '98.

The fly in the ointment, however, could be construction. "Everything seems to be right on target," said board CEO Brad Benson. "We just hope the supply increases," especially of lower-cost homes.

Speaking of construction, here's another early indicator: Denver-based M.D.C. Holdings in February announced it had received orders for 626 homes the month before. This number was second only to its January 1998 record of 724 home orders. M.D.C., parent of Richmond Homes, is one of the 10 top residential builders in the United States.

So, while some officials predict a slump of as much as 10 percent in home construction this year, that's in comparison with '98's outrageous standard. Inventories will continue to be tight as a tick.

First-quarter activity will slow, experts predict, while investors take a wait-and-see posture. The area's overall apartment vacancy rate will remain steady and strong, at 4.6 percent.

About 6,000 new metro-area apartment units were built in 1998, and the Denver-based Marcus & Millichap Real Estate Investment Brokerage Co. predicts that 6,500 to 7,000 units will be built in '99.

The rising cost of labor and materials, and municipal fees, have conspired to make financing more difficult. And "as prospective deals become less profitable due to spiraling costs, they become harder to finance," M&M reported. "Lenders are also eager to avoid the mistakes of Denver's past, further limiting funding for projects."

1997 set office construction records. 1998 was steaming ahead until the capital markets caught the third-quarter Asian Flu. "The first two quarters seemed like the perfect year," Doug Bakke, first vice president-office properties for CB Richard Ellis, told his annual forecast audience in late January.

How strong will the office market be this year? Downtown Denver, Bakke noted, will see its first speculative office building projects since the awful recession of 1986 - four projects totaling 1.25 million square feet.

"1999 will be the year of downtown Denver," Bakke said, with downtown rents rising 10 percent, again.

Elsewhere, the northwest corridor will continue to make like Superman, with regular strong spec projects. The Denver Tech Center area will slow a tad. Suburban rents will rise about 3 percent on average.

"1999 is on track for another year of steady, calculated growth," Bakke concluded. "But a word to the wise - there is not enough room in the market for all conceptual projects."

By and large, Fuller and Co.'s 1999 prediction agreed, foreseeing downtown rent increases in the 5 percent to 10 percent range, and suburban rent hikes of somewhat less than 5 percent.

Key to the healthy office market, Fuller said, was continuing hiring by telecommunications companies including Lucent Technologies, Level 3, Qwest, TCI and US West.

M&M, noting 1998's Real Estate Investment Trust "buying spree," factored them out of the 1999 equation. "Many REITs have put their acquisition plans on hold" due to dropping stock prices, wrote research manager Mark Larocque.

Still, Larocque said, downtown construction will stay strong, and other big buyers will step in to take the place of the REITs.

M&M sees a lot of upward indicators this year in the office space market: jobs, rents and sales prices will continue their sharp climb, and about 1.6 million square feet of office space construction will start this year. Only one indicator points downward: Office vacancies will drop 0.5 percent.

Denver's Cushman & Wakefield chimed in, saying, "During 1999 expect to see the market enter full equilibrium."

Times could hardly get any better. Perhaps this is why the Chicago-based The Counselors of Real Estate advised "getting out of the suburban office market while you can, with 100% (of interviewees) suggesting to sell."

With people moving into Colorado, buying bigger and bigger houses and taking up more and more office space - well, someone has to sell them all that stuff.

That's why retail construction is due to track the boom in consumer confidence and spending.

So most prognosticators predict. Not everybody agrees, however. "There's too much retail" in the Denver area, bluntly argued PricewaterhouseCoopers, while "traffic congestion begins to hurt northwest and southeast growth corridors." (Overall, PricewaterhouseCoopers gave investment in Denver-area real estate a "yellow light," warning that the market here is softening and risks overbuilding.)

Most other predictions, however, fell into the moderate-to-fabulous range.

Marcus & Millichap warned of a slight rise in retail vacancies, and a blunting of rent increases to just 3 percent, both as the result of the huge increase in new retail space entering the 1999 market. This increase will include 2.2 million square feet of retail construction startup.

CB Richard Ellis called '99 "the year of balance" for retail real estate in the Denver metro area. That means strong sales volumes, moderate rent increases, and a steady vacancy rate.

Fuller and Co. reported expected "strong demand" in the northeast metro area due to development around Denver International Airport and the completion of E-470; growth in the southeast and northwest "will continue to mirror each other as telecommunications and software development companies continue to spur growth"; and predicted strong growth in the southwest, "one of the few untapped spots in the metro area."

That just about covers the territory.

The McGraw-Hill Construction Information Group disagrees. "Construction of manufacturing plants," it predicted, "will drop 2% due to a weakened industrial sector."

The Counselors of Real Estate again advised shunning the industrial properties market. "Our interviewees (rated) industrial properties high on the risk of overbuilding in Denver; 67% suggest selling."

Not all was doom and gloom, however.

"There (are) only six other metropolitan areas tracked nationally by Cushman & Wakefield that have a lower vacancy rate than Denver," that company noted.

"The industrial market enters 1999 with incredible leasing and sales momentum," said Jim Bolt, CB Richard Ellis senior vice president-industrial properties. "So, barring a major change in our national economy, we should see continuing strong user demand."


"We now have had a sustained growing industrial market for several years and we should continue this trend for the foreseeable future," Bolt said, meaning "an extremely healthy industrial market that will be more insulated from an economic collapse than ever before. These are the good old days."
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Title Annotation:Denver's building market
Author:Lewis, David; Drazga, Barbara M.
Article Type:Industry Overview
Date:Mar 1, 1999
Previous Article:The great growth debate.
Next Article:Growing pains.

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