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DENVER-The biggest economic strength of the local economy also could be its Achilles heel, according to a new report by the Federal Deposit Insurance Corp.

The FDIC is adding Denver–along with Ft. Worth, Jacksonville, Sacramento and Seattle–to its lists of cities at risk of overbuilding. A total of 13 cities are at risk, says the FDIC, in its third-quarter regional outlook report. Already on the list are Atlanta, Charlotte, Dallas, Las Vegas, Orlando, Phoenix, Portland and Salt Lake City. Nashville has been dropped from the list because of tighter standards for inclusion.

Denver’s vulnerability to overbuilding is being caused by the infusion of high-tech companies, according to the report. In past years, Denver has widely been heralded by local economists and business leaders for moving from dependency on oil and natural resources to a diversified economy based on high-tech, telecommunications, biotechnology and mutual funds, such as Janus and Invesco, as well as other fast-growing industries.

“Many of Denver’s small high-tech companies are extremely sensitive to swings in the stock market and private capital funding sources,” concludes the FDIC report. “Denver is also home to a thriving financial services industry (e.g., investment firms, mutual fund companies), which isclosely linked to financial market conditions, increasing the vulnerability of the Denver Metropolitan Statistical Area.”

Finance, insurance and real estate sectors accounted for 8.1% of the MSA’s total employment in 1998, compared with 5.8% for the US, the report says. “Thus, the Denver economy would be more susceptible to a protracted recession from a high-tech downturn accompanied by a prolonged bear market, because of its heavy reliance on FIRE and the high-tech sector,” the report says. Thus, the Denver area would experience “a negative wealth effect” with a stock market decline.

According to a recent report by the Nelson A. Rockefeller Institute of Governments, “capital gains are about 74% more important to Colorado’s state finances than they are to the average state. Moreover, both a burgeoning high-tech sector and a booming stock market have led to strong gains in Denver’s real estate values. The rapid appreciation of home prices in the Denver MSA is a cause of concern, as the gap widens between median housing prices and median household incomes. The FDIC report’s conclusion: “In the even tof a high-tech or stock-market induced recession, the Denver economy would have to contend with a negative wealth effect that is likely to affect this MSA more than other metropolitan areas.”

Brad Neiman, who heads investment for Denver-based Mile High Properties, says he’s not buying the report’s conclusions. “The US has become a service economy as opposed to an industrial and manufacturing economy,” Neiman told GlobeSt.com. “The FDIC seems to have the concept that Denver would be more adversely hit because we are not a manufacturing hub.”Neiman also says he believes the Denver-area economy is diversified, with everything from high-tech to tourism fueling the economy.

Also, Neiman contends Denver’s high-tech business is really being driven by telecommunications giants such as Level 3 and Qwest Communications, which are global players, rather than under-funded consumer dot.coms, which are most vulnerable to collapsing.

“I was just talking to the head of a large real estate investment company this morning, and he says there is no lack of interest in investing in Denver by institutional financiers,” Neiman says. He said the national interest in Denver properties is much higher than in cities such as Dallas and Atlanta.

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