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— Multifamily Properties Quarterly — March 2016
C
olorado’s attractive lifestyle and
robust economy are drawing
people to the region, continu-
ing the demand for quality
rental housing in a market that
remains tight even though new apart-
ments are being built at a rapid pace.
During a typical year, metro Denver
absorbs between 5,000 and 6,000 units.
For the first nine months of 2015, total
net absorption was 5,111 units. Despite
the addition of 2,022 units added in
the third quarter, vacancy rates remain
low, pushing rents higher.The vacancy
rate increased to 5 percent in the third
quarter, from 4.5 percent in the second
quarter.The average rent for all units
in the Denver area at the end of Sep-
tember was $1,291.85, a 12.8 percent
increase over the $1,145.49 average rent
reported during the third-quarter 2014.
Rental rates continue to increase
because of strong demand; however,
the amount of new construction com-
ing on line may cause the market to
weaken in 2016.The number of multi-
family building permits issued reached
their highest level since 2002, according
to the 2016 Colorado Business Econom-
ic Outlook published by the University
of Colorado Boulder Leeds School of
Business. By the end of 2015, a total of
12,500 multifamily units were expected
to be permitted, an 8 percent increase
from 2014.The overwhelming majority
of the newmultifamily units consisted
of apartments rather than for-sale con-
dominiums, largely because of Colo-
rado’s litigious construction defects
environment.
Apartment construction has explod-
ed throughout the metro area.The
redevelopment of Denver Union Sta-
tion spurred a flurry of multifamily
development on the 19.5 acres sur-
rounding the historic building, which
is now home toThe
Crawford Hotel and
a variety of restau-
rants and shops.
There’s Cadence, a
219-unit building
west of the station;
Elan, a 307-unit
building; andThe
Platform, a 288-unit
tower. Most recently,
The Integral Group
broke ground on the
$30 million Ashley
Union Station, a
107-unit apartment
building that will include 75 units for
low- and moderate-income households
at 18th Street and Chestnut Place.
To the west, in Denver’s trendy Lower
Highlands neighborhood, Southern
Land Co. is building a 317-unit com-
plex on the site formerly occupied by
UnitedWay at 18th and Central streets,
andTrammell Crow Residential sub-
mitted plans to build 106 apartments
at the corner ofWest 32nd Avenue and
Tejon Street.To the east, in the Uptown
neighborhood, Novare Group is devel-
oping SkyHouse Denver, a 26-story, 354-
unit building at the corner of Broadway
and 18th Avenue.
In Cherry Creek, which hadn’t seen
a lot of apartment development until
recently, BMC Investments is building
Steele Creek, a 12-story, 232-unit com-
plex, and Zocalo Community Develop-
ment is building a 12-story, 182-unit
tower.
Market conditions here are attractive
to investors, who set a metro Denver
record with apartment sales of nearly
$2.9 billion in 2013. In 2014, they broke
that record by acquiring 121 proper-
ties with 27,546 units for $2.6 billion.
During the first nine months of 2015,
investors purchased 77 apartment
properties with 16,491 units for $2.7
billion.With decreasing inventory and
declining cap rates, many investors are
looking at secondary markets in search
of greater returns.
Thoughmany investors wonder if the
market is getting overbuilt, the increas-
ing population and healthy economy
– primarily measured by employment
growth – is keeping demand high for
rental properties.
The state added 70,200 jobs in 2015, a
2.8 percent increase over 2014, accord-
ing to the CU Leeds report. Between
1990 and 2013, new businesses added
an average of about 57,600 jobs a year in
Colorado. On average, about 45 percent
of the new businesses created during
that period still existed after five years.
Metro Denver’s unemployment rate
was 3.2 percent in September, the low-
est rate measured since May 2001,
according to the Colorado Department
of Labor and Employment.The state’s
rate fell to 3.3 percent in September,
down from 3.8 percent inAugust.
Year after year, Colorado ranks high
on lists of best places to live, retire or
earn a living, making it a go-to spot for
ality of life. In
nked Colorado
hich to make
a living, and the Organization for Eco-
nomic Co-operation and Development
ranked Colorado the sixth-best state
for quality of life. Additionally, Colorado
currently ranks fourth in startup activi-
ty and is the fourth-most entrepreneur-
ial state, according to the Kauffman
Foundation.
Those rankings and others are draw-
ing more and more people to the state.
Colorado’s population was estimated
at 5.4 million in July 2014, an increase
of 82,485 since 2013, according to the
report. In 2015, Colorado added nearly
101,000 people to its population, accord-
ing to a U.S. Census report released in
December.
Eighty-three percent of the state’s
population lives in the 12 counties
along the Front Range. Denver was the
fastest-growing county, accounting for
70 percent of the state’s population
growth withmore than 15,000 people
added between 2013 and 2014.
The influx of millennials, those born
after 1980 and the first generation to
come of age in the newmillennium,
largely drives apartment demand, but
many millennials are encumbered by
student loans, whichmakes it difficult
to justify renting some of the more
expensive apartments developers are
building.
The vacancy rate inmetro Denver
increased to 4.87 percent during the
fourth quarter, which is the largest
quarterly increase since first-quarter
2009, according to Apartment Insights.
Still, vacancy rates remained relatively
stable between 4.5 and 5 percent dur-
ing the last five quarters.The average
metrowide rent decreased $20 during
the fourth quarter to $1,293 – the larg-
est quarterly decrease in the 11 years
Apartment Insights has conducted its
surveys, and the first quarterly decrease
in six years.
The survey also found that more
apartments are being built than are
being absorbed, which has contributed
to some of the softening of the market.
It’s difficult to forecast whether this
is an indication that we are at a peak
and seeing the start of a weakening
market, or a temporary slowdown, but
the numbers show that the influx of
people to Colorado will continue, and
metro Denver’s apartment market
remains strong.
s
Jeff Johnson
Principal, Pinnacle
Real Estate
Advisors LCC,
Denver
Market Update
