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— Multifamily Properties Quarterly — May 2016
T
he collapse of the housing
bubble in 2007 affected single-
and multifamily building. Now
that we’re almost 10 years
past the problem, we see the
multifamily market bouncing back
strongly while single-family housing
has yet to fully recover.
There are several factors that we
see driving strong growth for apart-
ment occupancy, rents and, ultimate-
ly, values. Fortunately for apartments,
single-family housing for entry-level
buyers is stuck in low gear. This cre-
ates a wonderful tailwind for apart-
ment owners.
Why? Mortgage lending for entry-
level housing still is quite restricted
following the collapse of housing.
Entry-level buyers tend to be younger
and less well-established economi-
cally. Additionally, they are more
likely to have large student loans
outstanding and their credit scores
are lower. Also, their wages tend to
be lower. Finally, it is likely they do
not have sufficient savings to come
up with the higher down payments
required by banks. Mortgage qualifi-
cation has been restricted and many
would-be buyers cannot get on the
housing ladder.
As a result, potential entry-level
buyers are flocking to apartments or
sharing accommodations with one or
more people.
Additionally, many millennials pre-
fer to live in or near urban areas and,
given their economic situation, they
are far more likely to be renters than
owners.
Finally, single-family housing sup-
ply considerably lags its long-term
average, particularly
in the entry-level
market. Homebuild-
ers are focused on
the higher-priced
single-family homes
where demand is
greater and mort-
gages are available.
Single-family hous-
es are expensive
to build, hampered
by trades and sup-
pliers struggling to
recover from the
housing collapse.
Municipalities also are struggling to
keep up with permit demand and
approvals. We believe that entry-level
housing will take five to 10 years to
fully normalize in Colorado and most
other markets.
All of the above explains the Den-
ver multifamily property values
continuing their current inexorable
climb. Simply put, apartment permits
are well above the norm – recently
averaging 9,500 per year versus the
long-term demand of 5,500 units per
year. The overbuilding in apartments
is being (temporarily) absorbed by
millennials who are forced to defer
their entry-level home purchase.
However, we expect this artificial
demand to reverse within the next
two to five years as the millennials
gain increasing access to mortgage
financing. In the meantime, for the
next two to three years, apartment
developers will enjoy an Indian Sum-
mer that they will later come to
regret. The fact is, Denver apartment
deliveries are continuing well above
trend – some analysts
are projecting nearly
10,000 new units per
year for the next two
years.
In our shop, we believe
that there is consider-
able risk of continued
overbuilding in the
next two years. This is
reflected in the graph
below in which the red
bars represent known
projects built or under-
way and the yellow bars
represent deals in the
pipeline that might,
unfortunately, be built.
The real key to the
potential downturn will
be found in overbuild-
Marcel C.
Arsenault
CEO, Real
Capital Solutions,
Louisville
Market Observations
Images courtesy Real Capital Solutions
In 2005, practically anyone qualified for a mortgage, and
everyone reached the ladder. In 2015, mortgage origination
was highly restrictive, and only the strongest buyers could
reach the ladder. In 2025, mortgage origination will return to
normal, and qualified entry-level buyers will be able to reach
the ladder.
Denver’s Housing Ladder
