Will energy's bust take the economy with it?

The downturn raises concerns, but few ’80s comparisons – so far

As Yogi Berra said, it’s déjà vu all over again. Prices for oil and gas have plummeted. Drilling in the Denver-Julesburg Basin has been halved. Layoffs in Colorado’s energy sector have occurred almost weekly. Can massive office vacancies in downtown Denver be far off?

It happened before, when Colorado’s energy economy tanked in the early 1980s. The vacancy rate in downtown Denver’s overbuilt office towers rose to 31 percent in 1986. Recovery took years.

But it’s not déjà vu, say many economic analysts and business executives in Colorado. Metropolitan Denver, in particular, has a much more diversified economy far less dependent on oil and gas production, but with emerging bio-pharmaceuticals and clean tech sectors. Metro Denver has also become more attractive to companies as a place for headquarters. It has become a national, not just a regional, city.

And the circumstances of this energy downturn are very different than those of the 1980s. Denver in the 1970s and early 1980s was a time of rapid economic expansion. More than 50 million square feet of office space were built in downtown Denver during that time, tripling the existing supply, according to “A Brief Economic History of Colorado,” by Wilson D. Kendall.

The energy boom fueled the ascent. Reduced oil imports from the Middle East in 1973 and 1979 caused the price of oil to spike to near $40 per barrel in early 1980, the equivalent of $115 today. Oil executives were flying from Denver to oversee operations in Wyoming, Montana and North Dakota. Phil Anschutz was maneuvering his ranch over the Overthrust Belt on the Utah-Wyoming border into the wealth that would allow him to later invest in real estate, sports franchises and the Union Pacific railroad.

Then, in 1982, as the nation entered a recession, the sharpest economic downturn since World War II, oil prices began plummeting. They eventually reached less than $10 a barrel. From early 1982 to late 1983, drilling rigs active in the Rocky Mountain region fell from more than 600 to about 200, points out Kendall in his 2002 paper commissioned by the state demographer’s office. Even more dramatic was the collapse of the oil shale industry in northwest Colorado. On a Sunday in May 1982, Exxon, the largest of the oil shale companies, announced it was cutting its losses and leaving. Others eventually followed. On the Western Slope, 30,000 jobs disappeared in just a few years.

Hard-rock mining very nearly disappeared, too. In the 1970s, the Climax Mine near Leadville was the second largest consumer of electricity in Colorado, behind only the steel mill in Pueblo, and employed more than 2,100 people. In 1981, Climax closed and its companion molybdenum operation, Henderson Mine, located near Empire, downscaled. Other mines closed about the same time. From more than 12,000 employees, metals mining employment by the turn of the century had dropped to just a few hundred.

Still, Denver’s downtown profile kept pushing up. Two of Denver’s tallest buildings, even by today’s standards, Republic Plaza and the Wells Fargo Center (also known as the Cash Register building), were launched in the early 1980s, both after the oil shale bust. Construction projects can’t just stop on a dime.

The same thing was happening in the suburbs. Money was relatively easy to come by, and savings and loans gave it out readily, especially for projects in the suburbs.

In the Denver Tech Center, Walter A. “Buz” Koelbel Jr., with his father, built three office buildings during the boom at the intersection of I-25 and Orchard Road. They were able to rent all three, one 136,000-square-foot building to an oil company, Husky, and another 154,000-square-foot building to Tenneco, another oil company. But at the end of the five-year leases, they were gone. “And then all of a sudden there’s 280,000 square feet of totally vacant space,” says Koelbel. “That sort of thing happened all over Denver. We personally watched and experienced what happened with the steep climb and euphoria of the energy business, then watched it crumble before our eyes.” It’s fascinating now, he says, but then it was frightening.

Denver was a mess. From 1981 to 1987-89, average lease rates for “Class A” office space dropped from $25 to $14 per square foot, notes Kendall. In 1987, The Wall Street Journal noted in a front-page story that Denver was second in the world only to Kuala Lumpur, the capital of Malaysia, in office vacancies.

With job losses and falling incomes, the housing boom also collapsed. Too, Denver’s air stank and looked much worse than now. And when Tom Clark arrived in Denver to begin economic development, he found Lower Downtown so risky that male workers escorted women in the underground parking garage. “Very scary, very unsafe,” he says. Denver may have hit rock bottom in about 1989.
Clark, now the chief executive of the Metro Denver Economic Development Corp., remembers it as a time of finger-pointing. But most powerful was the observation made by a Hughes Aircraft executive, who was asked to appraise Denver from a national business perspective.

“We have always seen Denver as a district town, and a district town is a place where you have an office but you don’t have a headquarters or a major part of your company,” Clark remembers the executive saying. “We see Denver as a place with great opportunity that climbs to the peak of the mountain, and when they reach the peak they fall back every time. You guys have to prove to corporate America you can do great things.”

“That was a powerful message,” says Clark. “There were only about 20 of us in the room when he said it.”

Piece by piece, Denver created a better future. Federico Peña imagined a city in his election campaign of 1983 and then, in the depths of the bust, city and state leaders assembled plans: better vehicular access into downtown, Denver International Airport, the Colorado Convention Center. As Peña passed the torch to Wellington Webb, there was also Coors Field, the Pepsi Center and other features of the Central Platte Valley.

Over time, says Clark, regional rivalries and mistrust ebbed. Suburban leaders had little tolerance for Peña because – well, he was the mayor of Denver. But in 2004, when choosing the public face for the FasTracks campaign, the metro mayors chose John Hickenlooper. Along the way, elected leaders and economic development officials embraced a philosophy of “sell the region first and our cities second.”

But Denver’s economy has still managed to stumble. The dot-com bust in 2000 provided evidence anew, says Clark, that “chasing fads is just not something you can do to create a strong economy.”

Now, just 15 years later, things are better. “We have one of the most diversified metropolitan economies in the country,” says Clark. “We are driven by nine major clusters, and we have three or four subclusters.” Former Gov. Bill Ritter helped spur the clean-tech sector, while Gov. Bill Owens helped produce legislation that has drawn medical device and biopharmaceutical companies.

Instead of a regional city, Denver has become a national city, says Jeff Romine, chief economist for the City of Denver. “In the 1980s, we really were a city that was competitive with regional cities. Today, we’re a national city. We have different peer cities than in the 1980s,” he says.

Denver’s still not in the top-tier of cities. “We are not New York City,” Romine says. “We are not competing with Los Angeles. There are probably five cities in the United States at that level. We are in the next tier down. We are competing with San Francisco and Seattle in some areas, Atlanta in others.”

Based strictly on population, metropolitan Denver-Aurora is the nation’s 21st largest metropolitan area, according to the U.S. Census Bureau. But it punches above its weight.

Examples of company headquarters based in Colorado include Chipotle, Staples, Sports Authority, plus Davita, a kidney dialysis company, and Arrow Electronics, which is based in Westminster.

As a sector, people employed at company headquarters have the highest incomes of any industry in in Colorado, says Brian Lewandowski, associate director of the Business Research Division of the Leeds School of Business at the University of Colorado. This sector, classified as “management of companies and enterprises,” has increased steadily over time. Some 82 percent in Colorado are found in metropolitan Denver. That’s not surprising, given that 86 percent of Colorado’s economic activity occurs in that area from Colorado Springs to Fort Collins and Greeley.

But company headquarters, if well paying, are dwarfed in size by other sectors, which have also grown. In September, company headquarters employed 34,500 people in Colorado as compared with 316,500 jobs in private education and health services. “That’s incredible,” Lewandowski says. Trade, transportation and utilities totaled 436,300 jobs. Professional and business services, which includes architects and engineers, totaled 386,200 jobs.

As for energy jobs — yes, they still matter. In addition to Denver, there are other job clusters in towns across northeastern Colorado plus the Raton, Piceance and San Juan basins elsewhere in Colorado. The mining sector — including oil-and-gas jobs – has the second highest average income. But again, perspective matters. The mining sector — of which about 75 percent of jobs come from oil and gas — altogether has 35,000 workers out of Colorado’s 2.5 million employees.

In the last 50 years, says Lewandowski, Colorado — and the nation — have shifted from goods to services.

That said, reduced drilling will almost certainly have impacts in Denver and elsewhere in Colorado. The boom in oil extraction from the Niobrara Formation has made Weld County — including Greeley, the county seat — more wealthy. Those tax revenues will begin to fall off this year. “The question I would have is what have they done to diversify their economy so they are not so reliant on oil and gas?” says Lewandowski.

Within Denver, oil and gas jobs have grown from about 0.7 percent of total employment to 2 percent in the last 15 years. They’re well-paying jobs: an average of $185,876, compared to the city-wide average of $63,445, reports Romine. But even at the height of the boom, only 9,000 of the 120,000 employees working in downtown were in the energy sector. Even with a reduction of 3,000 employees, that wouldn’t mean deserted office buildings. “It will have an impact, no doubt about it. But it won’t go from say 95 percent occupancy level offices to 70 percent. It’s going to go to 91 to 93 percent,” says Romine.

Romine further notes that Denver ranks fifth in the nation in terms of jobs in the traditional energy sector, but it’s also in the top five in the clean-energy sector. It may rank higher, particularly in the combined sectors, but reliable statistics make it hard to pin down rankings.

Looking more broadly across Colorado, Lewandow-
ski sees low energy prices slowing the economy. After outperforming the nation in job growth following the recession, Colorado’s economy is losing its zip — partly, believes Lewandowski, because of the energy prices, reduced drilling and company layoffs. “We are starting to look a little more average than we have in the last four or five years,” he says. Rapidly escalating real estate prices may also make Colorado less attractive to workers from other states, inhibiting job growth.

But always there are exceptions. Antero Resources, whose largest share of assets lie in the Marcellus shale in the East, has an office at Union Station and just recently committed to occupying three-quarters of an adjacent building now being erected.

Mark Falcone, chief executive of Continuum Partners, the building developer, says it all goes back to Denver’s decisions in the 1980s to look forward. “I think Denver just continues to reinvest in its own infrastructure and quality of life in a way that very few communities have been willing to do,” he says. “And when I say Denver, the city and county have really been the tip of the spear. The broader metro area has generally followed, sometimes reluctantly, but they have generally followed.”

That reinvestment continues, he says, pointing to the looming redevelopment of the National Western complex. Denver, he says, “is on a really good path.”

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