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July 1-July 14, 2015 — COLORADO REAL ESTATE JOURNAL — Page 5B
S timulated by above-nation-
al-average rates of growth
in population and employ-
ment, the boom in Colorado real
estate markets continues to drive
prices and rates of construction
up. Since 2010, the annual rate of
change in Colorado’s population
has been about 1.5 percent per
year. Nationally, the annual rate
of population growth has been
about 0.78 percent per year, so
Colorado’s population has been
increasing at twice the national
average rate over the past five
years.
The population growth has
been supported by increases
in Colorado’s employment. In
just about every year since 2010,
Colorado has ranked among
the top five states in the U.S. for
employment growth. According
to an April 2015 report from
the Joint Economic Committee,
the industry sectors with the
largest employment increases in
Colorado since 2010 are min-
ing and lodging with 12,400
additional jobs (a 53.7 percent
increase), construction with
35,700 additional jobs (a 30.3
percent increase), and leisure and
hospitality with 49,300 new jobs
(an 18.9 percent increase). Since
the February 2010 trough in U.S.
employment, Colorado has added
about 272,200 jobs (an increase of
about 15 percent) to its economy.
This significantly exceeds the 11.3
percent increase in the nation’s
employment growth over the
same period.
The number of housing per-
mits has increased recently, but
as of May still had not reached
its pre-2007 levels. Between 1980
and 2006, the state of Colorado
has had about 35,500 residential
permits issued each year. Of these,
about 26,000 (73 percent) have
been for single-family homes and
about 9,500 (27 percent) have
been for multifamily homes (both
renter-occupied and condos).
The total number of residential
permits fell to about 9,400 (a
decline of about 74 percent) in
2009 and has climbed back up to
about 27,500 in 2014. While this
increase has been significant, this
is still well below the historic annu-
al average number of housing per-
mits issued each year in the state.
In addition, the mix of properties
being built has changed dramati-
cally since the 2007-2008 Great
Recession. Historically, single-fam-
ily permits have accounted for 73
percent of all residential permits.
In 2013 and 2014, single-family
properties have accounted for
about 58 percent of all residential
permits. Virtually all of the mul-
tifamily units are for renter-, not
owner-, occupied properties.
There is no doubt that the
construction defects law has dra-
matically reduced condominium
development in Colorado. This
legislation increases condomini-
um construction costs by at least
15 percent, and the market price
of condos has not risen sufficiently
to cover those
costs. There
were virtually
no condomini-
ums built in
Denver dur-
ing 2011 and
2012. This
lack of supply
of tradition-
ally affordable
condomini-
ums puts addi-
tional pressure
on single-
family house
prices.
Stimulated
by historically
low for-sale
inventories,
below-average rates of new con-
struction and above-average rates
of population increase, house
prices in several Colorado cities
are increasing rapidly. In Denver
and Boulder, house prices are
currently about 18 percent above
their pre-financial-crisis peak
levels. Between 2007 and 2015,
the cumulative rate of inflation
has been about 16 percent. This
puts house prices in Boulder and
Denver above their pre-financial-
crisis peaks even after adjusting
for inflation. The only other large
cities in the U.S. with house prices
exceeding their pre-financial-crisis
peaks after adjusting for inflation
are all in Texas: Austin, Dallas and
Houston.
Apartment rents have been
increasing substantially faster than
the rate of inflation with double-
digit annual increases in some
places. Between fourth-quarter
2009 and third-quarter 2014, aver-
age apartment rents in Denver
have increased over 23 percent.
The average increase masks sub-
stantial variation in rent changes
by property type. There was a
31.2 percent increase in rent for
efficiency units, a 28.5 percent
increase in rents for one-bedroom
units, a 24.8 percent increase for
two-bedroom units and a 14.6 per-
cent increase for three-bedroom
units.
The rate of inflation over
this same period was about 10
percent, indicating that inflation-
adjusted apartment rents have
increased about 13 percent. Real
increases in apartment rents of
this magnitude are not sustain-
able. In addition, multifamily
cap rates have declined since the
financial crisis. Between 2009
and 2015, apartment property
cap rates have declined by about
190 basis points. Capping higher
net operating incomes at lower
cap rates has yielded rapid price
increases in multifamily proper-
ties.
According to Real Capital
Analytics, prices for apartments
and central business district office
properties across the U.S. are now
significantly above their pre-finan-
cial-crisis peaks. Prices for retail
and industrial properties are just
below where they were before the
2007-2008 Great Recession. Cap
rates for Denver apartment prop-
erties (both garden and mid-/
high-rise) currently average about
6 percent, down slightly from
where they were this time last year.
Cap rates for industrial and
retail properties in Denver have
declined over the past year while
cap rates for office properties
have increased slightly. According
to Real Capital Analytics, between
April 2014 and April 2015, aver-
age cap rates for industrial prop-
erties in Denver have declined
from 7.8 to 7.4 percent; average
cap rates for retail properties in
Denver have declined from 7.4
to 7.1 percent. Average cap rates
for Denver office properties have
increased from 7 percent in April
2014 to 7.2 percent in 2015.
Interest rates, for both long-
term and short-term debt, have
stayed low by historical standards.
As of May 22, yields on one-
month U.S. Treasurys are still
practically zero, while yields on
10-year USTs are 2.2 percent.
While the Fed is likely to begin
increasing short-term interest
rates later this year, capital mar-
kets don’t expect much of an
increase in long-term rates for the
foreseeable future. The implied
yield on 10-year Treasurys embed-
ded in the current yield curve has
long-term rates increasing about
50 basis points over the next three
to five years. A yield on 10-year
USTs of 2.7 percent is still very low
by historical standards.
Thomas G.
Thibodeau
Academic director,
University of
Colorado Real
Estate Center
Thibodeau
is a NAIOP
Distinguished
Fellow.
E C ONOM I C F O R E C A S T
Chapter Sponsors
Brinkmann Constructors
CBRE, Inc.
Colorado Business Bank
Colorado State Bank & Trust
Confluent Development Services, L.L.C.
Cushman & Wakefield of Colorado, Inc.
DPC Development Company
Eide Bailly LLP
Essex Financial Group / Baron Properties
First National Denver
FirstBank
Forest City
Granite Properties
Kirkpatrick Bank
LBA Realty
Littleton Capital Partners
Majestic Realty Co.
McWhinney
Metro Denver Economic Development Corporation
Newmark Grubb Knight Frank
Opus Development Company, L.L.C.
Otten Johnson Robinson Neff + Ragonetti, P.C.
Polsinelli PC
Prime West Companies
Prologis
Town of Parker Colorado Economic Development
Trammell Crow Company
United Properties
US Bank Commercial Real Estate
Xcel Energy
Media Sponsor
Colorado Real Estate Journal
University Members
University of Colorado, Leeds School of Business
University of Denver, Daniels College of Business
Sustaining Sponsors
Brownstein Hyatt Farber Schreck, LLP
Transwestern
Rocky Mountain Real Estate Challenge
Land Title Guarantee Company - Major Sponsor
Westfield Companies, Inc. - Project Sponsor
Opus Foundation - Scholarship Sponsor
Supporting Sponsors
KeyBank Real Estate Capital
Snell & Wilmer LLP
Developing Leaders Program Sponsor
First American Title Insurance Company – NCS
NAIOP 2015 Corporate Sponsors