How Commercial Real Estate Impacts Denver Economy

The entire state of Colorado, and particularly its bustling capital city, Denver, have seen a high degree of change over the last several years. Along with the nationwide shift away from industrial labor in favor of a service-oriented economy over the last quarter century, Colorado has also seen unique transitions in its social and political makeup as well. Ample room to grow made the state attractive to top tech businesses in the early 2000s, and the influx of these workers ushered in a new era for the state. Although formerly more moderate, Colorado's voters now trend liberal, and have pushed for numerous social reforms. Most notably, it became the first state in the U.S. to legalize the sale and consumption of cannabis in 2013.

"Denver's rapid economic boom means growing pains for some."

These waves of change have manifested themselves in many ways, but perhaps in none more palpable than what's been seen in the real estate market. With wealthy technology firms come the desire for splashy offices and appropriately luxurious dwellings. The blossoming cannabis industry has also seen storefronts converted into cannabis shops. This high rate of change could be too much for some, both in regard to traditional norms as well as the rising cost of living.

According to the Colorado Real Estate Journal, the combined effects from a high demand for commercial property  and climbing taxes have pinched some property owners in the Denver area. The Journal reported that some landowners in both the commercial and residential sector believe the city's government is too reliant on big-name businesses relocating to Denver. While high-profile employers might boost the city's and state's prestige, some smaller property owners who have been around much longer feel as though they are being squeezed out.

"As we see values increase, taxes increase and bond initiatives pass, it continues to increase that burden on commercial property owners," Dan Simpson, a board member of the Denver Metro Building Owners and Managers Association, told the Journal. "While we're all in favor of funding schools and in favor of affordable housing, we have to be cognizant of the fact that our tenants are paying those tax bills and it has real impacts to their businesses and their bottom lines."

Property taxes

For one, commercial property taxes have been rising quickly throughout the Denver area. According to sources who spoke to the CREJ, Denver County commercial property taxes weren't much higher than $120 per square foot. However, tax rates have risen by double-digit percentages in many years since then. Looking at taxes from 2014 to 2015 only, some commercial buildings were seeing a 36 percent rise in property value. This would equate to a tax bill growing at a similarly fast clip.

A high level of demand for commercial property usually coincides with a spike in residential values as well, and this can certainly be seen in the Denver market. The Denver Post reported as of late September, home prices in the metro area were rising faster than household incomes , and were far outpacing the national average. While average home values increased by smaller margins as the summer drew to a close throughout the U.S., Denver still saw a year-over-year gain of 9.4 percent in July. Only Portland, Oregon, and Seattle posted bigger gains.

Affordable housing

While skyrocketing home values can be good for owners who bought at the right time, it makes things difficult for first-time buyers and anyone looking to rent. This has led to what some view as a shortage of affordable housing bordering on crisis levels. In general, the Denver housing market, like many other parts of the U.S. in recent years, has seen an inventory crunch. The Denver Post reported that although the situation showed signs of improvement toward the end of 2016, the city's housing inventory remains around half of what is has been historically. With greater demand for apartments and condominiums as well, rents have seen a marked increase.

Local and state officials are working to correct this problem, but that may mean even more property tax hikes for home and business owners. As part of an initiative on affordable housing passed by the City Council Sept. 19, an additional half-mill levy will be tacked onto property tax bills in order to generate $150 million over 10 years, CREJ reported. These funds will be used to preserve 6,000 affordable apartments and homes. The additional tax burden only equates to about an extra dollar per month for homeowners, but businesses may face a somewhat steeper expense - to the tune of $145 for every $1 million of property value.

"While the ½ mill levy doesn't seem like that much, it's just additive," tax expert Matthew Poling told CREJ. "It's not a huge dollar amount, in the grand scheme, although when you have a $300 million building, a ½ a mill can add up."

Denver's outlook on commercial real estate is still promising, despite these hurdles, but it remains to be seen just how the city will adapt.

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