“Energize” Denver is a disaster

This week, I looked at an industrial real estate deal in Denver. I was torn. On the one hand, mortgage rates are back above 7% for housing and as loans reset for commercial and industrial properties over the coming years, increased supply and lending costs should drive prices down. I also firmly believe the Fed has to keep rates where they are and the market is overestimating the number of cuts coming in 2024. One can’t say the economy is great with the stock market at all time highs and also say that we should be loosening monetary policy. That biases me against real estate in general as property values haven’t corrected from the insane monetary dump of the last 4 years.

But, it was a unique property with seller financing and some creative leasing and sub dividing options that were attractive and I like and trust the person who showed me the deal. So I looked at it very seriously.

The irony of the situation is that neither of the arguments mattered as we killed the deal after digging into Denver’s Energize Denver initiative. I’ve included a link to a presentation and it’s pretty ridiculous.

In short, Denver wants all new buildings and multi family residences to be net zero by 2030 and old buildings to revamp by 2040. They want to electrify heating, rip out the gas furnaces when they are replaced, install cool roofs and solar panels and… in short, make everything way more expensive. The “savings”, the program proclaims, are based on the social cost of carbon which can be anything you want it to be. Here’s an article that touches on power generation in Colorado and the accounting truck that is SCC.

But I’m Energize Denver, the stupidity is next level. Here’s an example. On this property, one of the buildings is vacant and needs to be upgraded. First, there is a benchmark of the power usage that the building owners must reduce by 30%. No one in the municipal government can point to how to handle that or what metrics to use, just that there must be a 30% reduction. How much higher would rent have to be to cover it? Could the market even manage it? To replace the natural gas heaters, already connected to a pipeline would cost $85,000. To install electric heaters would cost $320,000 and it’s unclear what upgrades would be required to the building to facilitate it. What’s worse? The building has only enough power capacity to power the electric heaters with nothing for any other equipment, which would take a big electrical upgrade. To every building in the neighborhood. Where is that electricity going to be generated from?

Now, apply these measures to every old building and multi family unit in Denver… you have an unmitigated disaster. Meanwhile … in China…

Not surprisingly, it killed the deal and to me, it makes Denver uninvestable. When you are working against cap rates that are below mortgage costs to begin with and have unquantifiable additional municipal code risk, you simply can’t buy.

Net zero has a massive cost. $4-$9 TRILLION per year each and every year until 2050. And politicians simply won’t acknowledge or see the long term damage they will do to their constituents and the economies they proclaim to serve. Meanwhile, in China….