Downtown’s sluggish recovery costing Denver tens of millions in unrealized sales tax revenues, study finds

Downtown’s recovery continues to lag behind the pace seen in a majority of prominent city centers and it is costing Denver tens of millions of dollars in potential sales tax revenues, according to an analysis from the Common Sense Institute, a business-funded think tank.

CSI looked at the growth in net taxable sales revenues across a dozen Front Range counties from Larimer and Weld down to El Paso and Elbert. Those sales were up 92% in the first half of this year compared to the first half of 2019, with Elbert County leading the way with a 229% gain, the study found.

Denver had the smallest gain of that group at 41%. Had Denver matched the regional average gain, it would have seen an additional $646 million more in taxable sales revenues, the report estimates. That underperformance works out to more than $60 million in tax revenues Denver may be missing out on this year based on its sales tax rate of 4.81%, according to a Denver Post calculation.

Although the comparison is countywide, Denver’s underperformance appears to be mostly centered in the downtown area, which CSI defines as the neighborhoods of Auraria, Capitol Hill, Central Business District, Civic Center, Five Points, North Capitol Hill and Union Station.

“Compared to other cities — we know we have more potential. This isn’t something the Downtown Denver Partnership can solve on its own or that government or business can solve on its own,” said CSI Urban Development Fellow Kelly Brough, who co-authored the report with DJ Summers, CSI’s director of policy and research and Erik Gamm, a senior research analyst.

Downtown Denver foot traffic is about two-thirds of what it was in 2019, a recovery rate that ranks 40th, ahead of Pittsburgh and behind Philadelphia, out of the 55 metro areas that a University of Toronto School of Cities report looked at. Weekend traffic has recovered better than weekday traffic has, but that rebound also lags behind most other cities.

Office vacancy rates are at a 15-year high with just under a quarter of the available space going unused. The downtown area has 13.4 million square feet of office and retail space available. A growing number of property owners can’t collect enough rent to meet their loan payments and more lenders are foreclosing on defaulted loans.

But there is a paradox in downtown’s malaise. Excess supply in the face of reduced demand should cause prices to fall, but that isn’t happening. Despite the glutted market, office rents averaged $37.60 per square foot last year, the highest ask by landlords on record.

“The fact that downtown Denver’s rental rates remain high may indicate many commercial leaseholders are still holding onto multiyear
leases. It may also indicate a bullish feeling about downtown Denver and its chances for recovery,” Brough and her co-authors said.

Landlords may also be trying to stay ahead of rising expenses. Regulation 28 and Energize Denver will require owners of larger buildings to invest in energy efficiency and other upgrades toward statewide decarbonization targets. Those rules, which will cost billions of dollars to implement, only compound the financial stress that large property owners face.

Denver also has one of the highest minimum wages in the country at $18.29 per hour for non-tipped employees. If customer traffic were robust, that might be easier to absorb, but restauranteurs have cited high labor costs as one reason why they are shutting down.

University of Toronto researchers studied 80 variables to try and explain why different cities have recovered at different rates. Denver’s recovery is 4.8 percentage points behind where it should be looking at its remote workforce and 9 percentage points behind based on its population density.

That means some “X” factors are at play. The Downtown Denver Partnership, in its surveys, has found more than half of respondents point to the 16th Street Mall project, which has been highly disruptive and has stretched on for longer than expected, as a reason they are avoiding downtown.

An even bigger deterrent cited, however, was the lack of a “sense of safety and security.” CSI studied crime and homelessness, variables not included in the University of Toronto study, and areas that Mayor Mike Johnston, who defeated Brough in 2023 for the job, has also targeted.

CSI found that property crime growth correlated more highly with a lagging recovery among cities than economic variables. And while property crime rates have improved from 2022 peak levels in Denver, the overall crime rate has not.

Comparing the Cherry Creek North neighborhood to the downtown neighborhoods is instructive. If downtown’s struggles were just a remote work problem or a Denver-wide issue, then Cherry Creek should not be doing so well. But it is one of the hottest office submarkets in the country. Cherry Creek has an office vacancy rate one-eighth of Denver’s and a much lower crime rate might be one reason why, CSI said.

Brough said downtown Denver lags behind most of its peer areas across the country in its recovery; Denver is in last place in increasing sales among its peer counties along the Front Range, and within Denver, Cherry Creek is greatly outperforming downtown, even though it is only a 10-minute drive away.

“I don’t believe it is a fair comparison. The dynamics of Cherry Creek and downtown Denver are very different and quite complementary,” said Kourtny Garrett, CEO of the Downtown Denver Partnership. Downtown has much more office space and is home to a much more diverse population across all income levels and serves as a transportation hub.

Cherry Creek, while different, shows that Denver can come up with formulas to create thriving areas, Brough countered.

Garrett criticized the CSI report for using a geographically broader definition of downtown than what the partnership and the city use, while also acknowledging the stress on the commercial office market that the CSI report and others have captured.

Her sense as someone who has feet on the ground and is working on downtown issues every day is that things are turning the corner and the recovery will gain momentum. Beyond office worker traffic, which is about 60% to 65% of pre-pandemic levels based on cellphone records, weekend visits and convention traffic have recovered to 85% or better of pre-pandemic levels.

The 16th Street Mall is nearing the home stretch in its $175 million renovation that will bring a much-needed refresh to the spine that unites downtown. And if voters approve on Tuesday, the expansion of the Denver Downtown Development Authority,  which was launched to redevelop Union Station, could funnel an additional $500 million in capital for improvements.

Johnston has pushed for that expansion, one of several initiatives to revive the city’s core. His administration achieved a goal of sheltering 1,000 people experiencing homelessness in the first six months of his term last year and is working on the next 1,000 under the All in Mile High initiative. In January, the administration rolled out its “Clean and Safe Downtown” program.

“Revitalizing downtown has been a priority for Mayor Johnston since day one, and we’re proud of the work we’ve accomplished in just one year, including closing all downtown encampments resulting in more than 350 blocks of downtown and beyond permanently closed to camping, accelerating 16th Street construction, and improving public safety by significantly reducing both violent crime and property crime,” said Jordan Fuja, the mayor’s press secretary, in an emailed statement.

He added that foot traffic is up in downtown as a result and local businesses are reporting a significant boost since the reopening of 16th Street and approval of the authority should generate historic funding.

“… We’re committed to growing downtown Denver into a vibrant city center where people from around the country come to live, work and play,” he said.

Brough, in the report, recommends more residential offerings be brought downtown, which could help replace missing workers with permanent residents. Mayor Michael Hancock got the ball rolling on that in 2022 with his adaptive reuse task force, but the costs associated with converting large buildings, especially those built in the 1970s and 1980s, have proven problematic.

To help with crime, she recommends the city strengthen its drug courts, something she commended Johnston for doing.

Downtown Denver is home to a high concentration of government workers and one way to boost traffic levels would be to have state and city employers push a harder return-to-office policy. Private employers could be encouraged to do the same, although backlash would likely follow.

Both Garrett and Brough agree that Denver needs to look forward rather than trying to restore what existed before the pandemic. Brough said Denver has been here before, when the oil and gas bust in the 1980s left downtown flat on its back.

“We can go further faster, but it will take more of us and more awareness,” she said.