Denver's Next Emerging Real Estate Investment Opportunity?

Denver Aerotroplis

In our experience Denver has many areas that are changing rapidly and are attracting all levels of investment. Real Estate Investment Trusts, venture capital-backed investment funds, and large and small individual investors are active in this market. They are buying existing assets, repurposing others in active sites, and developing areas in established neighborhoods and in new areas on the outskirts of the metropolitan area.

At Canon Property Group we have had success in finding real estate assets for our investor-clients and seller-clients in areas such as Sloan Lake, Jefferson Park, RiNo, LoHi, Edgewater, and Frederick, Colorado, for example.

Another area that has recently been in the news and has attracted significant investment from the private sector is the land around Denver International Airport. There is the Gaylord Entertainment development, Transit Oriented Development (TOD) around lite rail stops and Peña Boulevard interchanges: Panasonic’s “smart city” project, hospitality, commercial, and residential developments.

Is all of this development air transportation-related or is it occurring just because there is a lot of available land “out there?” If the development is linked to air transportation, why is that the case? In a series of blogs, we will address this question and provide, we hope, some insight into the economic drivers behind this development.

Summary of The Case

All over the world, multimodal connectivity, anchored by air transportation, is stimulating commercial real estate development, both infill and new. Why? Since the time of the Phoenicians, transportation hubs have stimulated economic growth and attracted wealth.

The prosperity of Phoenician cities … was based on trade, and it was the search for new commodities and new markets which resulted in the Phoenicians branching out from the narrow coastal strip of the Levant and colonizing territories throughout the ancient Mediterranean from the 10th century BCE 1.  The Phoenicians’ trade routes were by sea, the most efficient and widespread mode of transportation available at that time. Wherever they established trading posts they brought wealth and residents.

Today air transportation is the only global transportation network and when linked with other modes of transportation (rail, road, sea, fluvial) its impact can be monumental.

In 1894, while at the University of Michigan, Charles Horton Cooley wrote about the impact of transport nodes on urban form. His conclusions reflect the reality the world has known for hundreds of years.

Population and wealth tend to collect wherever there is a break in transportation. By a break is meant an interruption of the movement at least sufficient to cause a transfer of goods and their temporary storage. If this physical interruption of the movement is all that takes place we have what I may call a mechanical break; but if on account of the close relation between transportation and exchange…the physical interruption causes a change in the ownership of the transported goods, we have a commercial break

(The Theory of Transportation, Cooley, 1894, p. 91).

The commercial breaks to which Cooley refers are the same types of “trade transactions” as the Phoenicians’. Every student of history knows that transportation enables trade. At transport nodes, trade takes place. In our world today, trade attracts investment in real estate, companies to occupy that real estate, residents to serve those companies, and, as a consequence, trade generates more trade. The trade that occurs at these nodes increases wealth and attracts residents.2

If these goods traded are raw materials or component parts then they may generate manufacturing or assembly sites. Because of the service they provide in the facilitation of trade, logistics operators locate in and around these centers. The persons doing the assembly, manufacturing, loading, unloading, and providing local and longer-distance distribution require supporting retail, restaurants, and other services.

Airport City Denver

In 2012 Denver was the host city of the “Airport Cities Global Conference” where Mayor Michael Hancock announced the “Airport City Denver.” Airport Cities Conferences were major airport business venues that occurred for 15-years and attracted hundreds of airport management executives, investors, and service providers. The last one was in Qingdao, China in November, 2016 where I was a keynote speaker on “Biomedical and Logistics Clusters in the Aerotropolis.” Each year the conference moved to a major city in a different country. Beijing, Johannesburg, Denver, and Dubai were some of the host cities.

Let’s look at why a conference such as this would attract hundreds of airport executives, investors, and service providers and what it all means for real estate asset owners and investors.

Denver International Airport (DIA) is composed of 53 square miles of land, one terminal, three concourses, and six runways. Hancock said the DIA Master Plan, prepared by MDX Development Strategists, defined targeted economic clusters that would have designated geographic areas within a 9,000-acre area around the airport. These include Tech, Agro, Logistics, and Aero. There are two other areas, Gateway and Center. Gateway is oriented toward Transit Oriented Development (TOD) and Center is the airport core.

On announcing the Airport City Denver, Mayor Michael Hancock said, “We will create a development that thrives on the airport’s natural synergy, attracting business and jobs that benefit from a close relationship to the airport and its inherent access to national and international markets.” Remember what Cooley wrote in 1894, “Population and wealth tend to collect wherever there is a break in transportation.”

Mayor Hancock went to say that DIA has a $26 billion annual economic impact on the Denver Metropolitan Area. Today 170,000 passengers per day pass through DIA and over 30,000 are employed there. It is the area with the highest concentration of people in the state. As a result, it is the largest economic driver in the State of Colorado.3

Now what the heck does that mean? From the reaction in the local press, not many people understand what it means. 

The Denver Aerotropolis

To understand the Mayor’s message and the map above that delineates Denver’s Aerotropolis, it is necessary to understand some basics about the Aerotropolis concept.

An Aerotropolis is an urban region whose infrastructure, land use, and economy are centered on an airport. Clear enough? Probably not.

An Aerotropolis is composed of two parts. The first is the airport. It has aeronautical investments and operations that keep the planes flying and the passengers traveling. It also has businesses (hospitality, retail, parking, airlines, and support services) that generate revenue. And, it has logistics services and facilities that move cargo to and from the airport. These elements compose the “airport city.” The Airport City is the multimodal, multi-functional central business district.

The second component is the surrounding corridors that might extend for 10 to 20 miles from the airport and are composed of clusters of aviation-oriented businesses and industries and urban areas available for new and infill development. The businesses and industries are frequent and critical users of air transportation. The users of the airport and the businesses feed upon one another, creating a positive self-sustaining feedback loop.

The Aerotropolis Economic Model

Source: Michael Canon 2010

The Aerotropolis requires seamless multimodal transportation connectivity (anchored by air transportation) and the consequent aviation-linked commercial, industrial, and urban development. Air transportation for passengers and freight is ideally seamlessly linked to the other modes of transportation (road, rail, fluvial and ocean). “Seamless” is necessary because that makes supply chains, whose operations are located in these corridors, predictable. When supply chains are predictable, the inventory in the pipeline can be reduced, costs lowered, and companies can service their customers better. The site then becomes more attractive to further investment. Improved connectivity, which is the bane of every airport management team, can substantially reduce the transaction costs associated with exporting and importing, and thereby improve a city’s ability to take full advantage of the benefits offered by global and regional value chains.

The products that move through this multimodal process usually have high value to weight ratios or they are time-sensitive. “Time-sensitive” means they will lose value if not delivered on-time, or the consignee will lose revenue or customers if the product is not on the shelves when the customer demands it.

The Aerotropolis adds speed and predictability to the commercial transactions that Cooley talked about. As a result, consumers all over the world have become accustomed to the “Amazon Effect.” They have been trained to expect that they can buy anything, anywhere, anytime and have it delivered within two days free of transportation charges. If a supply chain has regular hiccups, delays, and uncertainties, these consumers flee to different suppliers.

Supply Chains

Chief Supply Chain Officers and the heads of Global Logistics are constantly in search of the ideal locations for their operations to serve their customers at the lowest total cost of delivery and with the most consistency. Beyond those elements they also consider a myriad of others that include the availability of the workforce they need, the access to materials and components, schools and healthcare facilities for their employees’ families, and “lifestyle” items like restaurants, entertainment, and hotels.

Real estate investors that build these facilities for these companies understand these issues. They also understand the needs of their customers’customers. These investors have their required rate of return on their investments, their risk tolerance, their planning horizon, and they understand their exit strategy. All of these criteria are thrown together in their investment stew before they pull the trigger and decide to build or renovate and adapt existing facilities.

Importantly, these decision-makers understand the importance of connectivity and its potential impact on the preservation of their assets value over time.

Source: Michael Canon 2010

An operational area near an airport with management that understands time criticality, as does Denver’s, creates the basis for investments by supply chains.

In a 2016 article, Michael Canon co-authored with John D. Kasarda, PhD, we noted the following about real estate development:

The management of the real estate development in an aerotropolis is an essential yet complex challenge that requires a long-term planning perspective, specific skills and experience, and a willingness to adjust to the needs of investors, developers, and their business tenants. The aerotropolis master planning team must consider how to incorporate existing economic clusters into the plan, identify the zoning regulations that need to be changed, and, if pertinent, suggest a land acquisition strategy. The team must also assess infrastructure costs and funding mechanisms along with site planning and suggestions for marketing specific aerotropolis sites to investors, developers, and tenants. 4

Michael Canon and John D. Kasarda, PhD
In that same article we discussed the challenges of managing stakeholders’ interests (who are the stakeholders in DIA’s Aerotropolis milieu?), the importance of a flexible, evolving planning process, the importance of connectivity, economic clusters, and investment criteria. In this blog we will address those issues, some in greater detail than others.