Developers having high hopes despite coronavirus
Will city become a tenant’s market or will commercial landlords have the upper hand?
Over the last decade, Denver emerged as one of the trendiest markets in the United States for young professionals and the companies seeking to employ them. That was before COVID-19 pandemic tore the economy to shreds.
More than 540,000 Coloradans have filed for unemployment over the last three months. Signs of a construction slowdown are emerging in the Mile High City. It’s not clear yet how months of companies adapting to having their employees work from home will impact the city’s office market but a major downturn in the oil and gas industry is expected to lead to plenty of available space for subleasing downtown.
The developers behind some of the most visible commercial and mixed-use projects that were underway in Denver before the virus hit are striking an optimistic note. Their buildings are on schedule or close to it, they say, and they believe the city may become an even more attractive place as people reconsider living in dense, coastal cities such as New York, Los Angeles and San Francisco during and after the pandemic.
“We’ve heard much discussion from companies as well as individuals about the appeal of the climate and the relatively less dense urban environment that allows for a very healthy lifestyle and engagement with the outdoors,” David Haltom, the Denver-based vice president with development firm the Patrinely Group, said of the city.
Houston-based Patrinely is developing
the Block 162 tower in partnership with fellow Texas company USAA Real Estate. The 30-story building under construction at the corner of 15th and California streets is making its mark on the Denver skyline and will bring 600,000 square feet of new office space to the market. It is expected to be completed in December — essentially right on schedule — and tenants could move in as soon as January, Haltom said.
He isn’t ready to say who those tenants might be, but Haltom said some of the companies looking at Block 162 would be new to the Denver market. Patrinely views that as a positive sign for the future of the city and the tower. Small group tours of the building, still being wrapped in a steel frame with the glass sheath being added behind it, have been going on for a few weeks now.
“We definitely saw a slowdown between the end of February and the end of March when a lot of the COVID-related restrictions were implemented. Almost all of our discussions were paused,” Haltom said. “But I am happy to say we have had several of those tenants reengage. It seems clear that while things are not back to normal the situation has definitely begun to thaw.”
Haltom credits Block 162’s general contractor, Swinerton, for keeping construction on track with coronavirus safety measures that include daily health surveys and temperature checks for all workers.
The one supply hang-up the developer had to navigate came when an Italian stone fabricator doing work for the project temporarily shut down when that country was ravaged by the virus.
That fabricator is open again and working on materials that will be used in Block 162’s lobby and elsewhere, Haltom said.
Italy’s coronavirus crisis outbreak also touched McGregor Square, the ultra-trendy, mixed-use project being developed by Colorado Rockies co-owner and CEO Dick Monfort just across 20th Street from Coors Field. The project, which will feature 103 luxury condos including one for Monfort and his wife, had to wait on some custom cabinets from the country.
McGregor Square is on track for a mid-January grand opening, said Patrick Walsh, the development’s general manager. That’s just a few weeks behind schedule. Hensel Phelps, the general contractor, also instituted daily temperature checks for workers and visitors as part of its coronavirus protocols.
One retail tenant, the Tattered Cover Book Store, has announced plans to relocate its Lower Downtown location to McGregor Square. A few other tenants are working with the development team to design their spaces and should open along with the Tattered Cover in the first three months of 2021, Walsh said.
“Definitely our goal is to have most of our site activated by (baseball’s) Opening Day 2021. Especially with everything going on this year, it would be nice to have a very positive 2021 with baseball to start out with,” Walsh said.
On a tour of the property last week, Monfort excused himself to join a call with Major League Baseball. The status of the league’s 2020 season is still very much in limbo with the league and players’ union still fighting over pay and other issues.
The biggest question mark at McGregor Square is who will occupy its roughly 205,000 square feet of office space. Shared office brand WeWork was in talks to take on all of it at one point. After some very public struggles in 2019 that included the ouster of the company’s co-founder and CEO and $1.5 billion private equity bailout, WeWork is no longer involved. That had nothing to do with coronavirus, Monfort said.
Monfort and Co. have a list of eight to 10 tenants that could fill the space but negotiations are ongoing.
“We had really strong conversations in March with two tenants that would have taken on about half of it,” Monfort said. “Right now, everything has been put on hold a little bit.”
There are three factors Monfort thinks will shape McGregor Square’s office building: how the economy fares, how companies adjust to work-from-home business models and what those business models will mean for their space. Will companies need less square footage because they are smaller or are allowing more workers to stay home or will they need more because they want to space out their workforce and allow for more social distancing?
Commercial real estate broker Steve Billigmeier said he doesn’t think anyone has a good answer yet for what square footage math will look post-coronavirus like but he knows what he is hearing for his clients. Billigmeier is an executive managing director with the Denver office of Cushman & Wakefield. He exclusively represents commercial tenants in negotiations with landlords and is working with companies that have looked at Block 162 and McGregor Square.
“I can tell you, just based on anecdotal commentary, I think the mind-set of tenants is that they are going to need less space postCOVID after factoring those things in,” he said.
With 18 years of experience in Denver, Billigmeier says he doesn’t think developers overbuilt office space during the decade-long economic boom that coronavirus brought to an end. He’s also is aware of some planned office projects are now on hold. But he expects sublease space to be plentiful, something that should make rent cheaper.
He agrees with the logic that Denver and other “lifestyle” cities such as Austin, Salt Lake City and Portland, Ore., are well-positioned to scoop up people and companies that decide to leave the country’s coastal megacities in the aftermath of the pandemic, but that doesn’t mean landlords will have the upper hand in negotiations.
“The tenant mind-set is, ‘We are not going to commit to a long-term deal unless we feel we are getting a post-COVID deal structure,’ ” Billigmeier said.
One Denver developer who is part of the construction industry slowdown also hopes to take advantage of it. Central Street Capital, a family development office, has paused its plans to develop a 70-room hotel at the corner of 18th and Central streets in the city’s Highland neighborhood.
Isiah Salazar, the firm’s vice president of development, said the decision not to break ground this spring was made because of the damage COVID-19 has done to the hotel industry. The company hopes to pick things back up in spring 2021, but the five-story building could still get underway this year, Salazar said, if things play out in Central Street’s favor. The key will be if the prices of labor and materials come down enough as construction work across the city slows.
“If the stars aligned, we could break ground later this year if we started seeing some good savings on the hard costs,” Salazar said. “I think there’s definitely going to be slow down across the board.”