#568: Denver Data Centers Face $26M Utility Challenges and Energy Crisis

Denver Investment Real Estate

The Denver commercial real estate market is experiencing significant shifts as infrastructure challenges collide with development opportunities, creating both obstacles and potential windfalls for savvy investors. From data center developments facing power grid limitations to the emerging trend of motel-to-multifamily conversions, understanding these market dynamics is crucial for making informed investment decisions in today’s complex environment.

Episode Overview

In this episode, I sit down with Kayla Mahoney, a commercial real estate broker with Engel & Völkers and president of the Mile High Exchangers, to explore the current state of Denver’s commercial market. Kayla brings a unique perspective, having transitioned from the music and art industry to become a successful commercial broker with 11 transactions in her first year. We dive deep into the challenges facing data center development in East Denver, the impact of new taxation policies on development projects, and emerging opportunities in smaller suburban office spaces and alternative asset conversions. Her insights reveal a market in transition, where traditional approaches are being challenged by new regulations and infrastructure limitations.

https://youtu.be/8YLlemi89uo

Timestamps

(00:00) Introduction
(03:45) Career Transition from Music Industry to Commercial
(06:12) Data Center Development Challenges in East Denver
(13:07) Current Client Strategies and Market Positioning
(18:30) Motel to Multifamily Conversion Opportunities
(21:15) Cap Rate Compression and Buyer Migration
(24:48) Investment Opportunities in Colorado Springs Market
(27:25) Long Term Investment Strategies One Subway Stop

Data Center Development: Promise Meets Reality

The data center boom in East Denver represents both massive opportunity and significant challenges, with infrastructure proving to be the primary bottleneck for these high-value developments.

“Right now in East Denver, there’s a huge influx of investors wanting to park capital into data center developments. The reason why they pick East Denver is because there’s ample amount of land out there… But we’ve been seeing a lot of deals fall out of contract for these larger land acquisitions and the cost of utilities going to those in order for the developments to happen has just been through the roof,” Kayla explained.

• Power grid limitations are forcing developers to abandon projects, with some utility connections costing up to $26 million for single sites.
• The Energize Denver initiative compounds the problem by potentially reducing available power to just 40% of current capacity if steam power is eliminated.

This situation creates opportunities for patient investors who can navigate the infrastructure challenges while potentially benefiting from future grid improvements and tax forgiveness programs currently under government consideration.

Taxation and Regulatory Headwinds

New development taxes and regulatory requirements are significantly impacting project feasibility across all commercial asset classes in Denver.

“Recently the city of Denver has passed a lot of bills to increase development taxes… when margins to develop are really only 3 to 5%, it makes it near to impossible to pencil when you’re getting a $7 per square foot tax increase,” Kayla noted about the affordable housing development fees now affecting all new construction.

• Development margins of 3-5% are being compressed by new tax structures that will increase annually, creating a challenging environment for traditional development models.
• The 180-day development approval guarantee reflects systemic delays, but the uncertainty around permitting timelines adds significant risk to large-scale investments.

These regulatory changes are pushing some developers to reconsider Colorado as an investment destination, while creating opportunities for those who can adapt their strategies to the new environment.

Alternative Asset Opportunities and Market Adaptation

Creative investors are finding opportunities in asset conversions and smaller-scale projects that avoid some of the regulatory hurdles facing larger developments.

“I’ve been seeing a lot of multifamily conversion too to try to deal with the housing shortage that we have. I have a handful of like office to multifamily motels to multifamily… The issues that I’ve been seeing though, in why my listings cannot be converted into multifamily is just because of the water rights,” Kayla shared about emerging conversion trends.

• Motel-to-multifamily conversions offer existing infrastructure advantages but face water rights limitations in rural areas.
• Smaller office spaces under 25,000 square feet in suburban markets like Lakewood are seeing strong demand as they avoid Energize Denver requirements while offering easier parking and lower rents.

The key insight here is that successful investors are focusing on assets that require minimal infrastructure upgrades while serving underserved market segments.

Geographic Opportunities and the “Next Subway Stop” Strategy

Kayla shared invaluable wisdom about timing market cycles and positioning investments ahead of development trends.

“The best advice I ever got in real estate investing actually came from an art teacher, not a real estate investor… He’s like, I would see what was happening and what subway stop people wanted to live by, and I would invest in the next subway stop down. And that’s why I was always successful,” she recounted from her mentor’s guidance.

• Colorado Springs presents compelling opportunities due to military population influx and lack of Class A multifamily inventory, despite having income levels that support higher rents.
• Northern Colorado markets like Frederick and Mead offer land banking opportunities between established markets, positioned to benefit from future development spillover.

This strategy emphasizes the importance of understanding development patterns and positioning investments in areas that will benefit from future growth rather than chasing current hot markets.

Market Conditions and Buyer-Seller Dynamics

The current commercial market reflects a significant disconnect between buyer expectations and seller pricing, with different asset classes experiencing varying levels of stress.

“I tell clients that sellers are on Mars, buyers are on the moon, and I’m an astronaut just trying to get everybody back on one rocket ship to come back to Earth,” Kayla described the current pricing gap between market participants.

• Out-of-state buyers seeking 8-10% cap rates are finding limited inventory in Denver’s compressed cap rate environment of 4-7%.
• Banks are beginning to move away from loan extensions, particularly in hospitality, with foreclosure processes typically taking 6-12 months for larger assets.

The market appears to be in a transition phase where asset classes like industrial and retail maintain seller advantages, while office and some multifamily segments are shifting toward buyer markets.

Conclusion

Denver’s commercial real estate market is navigating a complex landscape of infrastructure limitations, regulatory changes, and shifting investor expectations. Success in this environment requires understanding the interplay between development constraints and emerging opportunities, particularly in alternative asset classes and suburban markets that avoid some of the headwinds facing larger urban projects.

The key takeaway from Kayla’s insights is the importance of adaptability and forward-thinking positioning. Whether it’s investing in the “next subway stop,” finding creative conversion opportunities, or targeting assets that sidestep regulatory hurdles, successful commercial investors are those who can identify and capitalize on market inefficiencies created by current challenges.

For investors looking to navigate this evolving market, focus on understanding local regulatory impacts, infrastructure limitations, and demographic trends that will drive future demand. The opportunities exist, but they require a more nuanced approach than traditional commercial real estate investing has historically demanded.

Links from Podcast

Connect with Kayla Mahoney:

Email: [email protected]
LinkedIn: https://www.linkedin.com/in/kaylamahoneycre