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Page 30 — Multifamily Properties Quarterly — February 2017
from across the industry shared their
expectations for the coming year as
well as offered guidance on what to
watch to gauge the market’s health.
• Market statistics. Absorption,
vacancy, occupancy and rental rate
growth all contribute to the perceived
health of the multifamily market.
As units continue to come on line in
2017, Bruteig predicts that vacancy
will continue to rise.
But experts were quick to note that
vacancy and absorption in Colorado
typically follow a seasonal pattern.
Vacancy tends to push up in the win-
ter months and then decrease April
through October, said Shane Ozment
with ARA Newmark.
“Denver has always had a seasonal
nature to its absorption,” said Tom
Wanberg and John Blackshire with
Transwestern. “We will have a clearer
picture of where the downtown mar-
ket stands by July.”
After years of double-digit rent
growth and tight occupancy rates,
both figures are expected to see mod-
erate increases – much more in line
with their long-term averages.
Downtown Denver, which witnessed
more than half of the new multi-
family development in the past few
years, may see negative or flat rent
growth. “There’s just no way around
it, because you’re going to deliver all
these units,” said Ozment.
However, Ozment predicts that
some specific neighborhoods, such as
the Highlands, Lower Highlands and
Golden Triangle, will continue to see
rent growth. And he anticipates the
suburbs will see 3 to 5 percent rent
growth. The suburbs enjoyed double-
digit rent growth from 2010 to 2015.
Many of the ideally located, older
buildings have been updated this
cycle and are reaching a threshold for
high-dollar amount. Before this ’80s
product can increase more, the newer
product will need to increase rents,
said Ozment.
Going hand-in-hand with stagnant
or decreasing rent growth is the rise
in concessions.
“Many experts believe 94 percent is
the magic line for occupancy to affect
upward pressure on rent,” said Mark
Williams with the Apartment Associa-
tion of Metro Denver. “If occupancy
dips below 93-94 percent in Denver,
you typically will see much more
competitive discounts and conces-
sions to attract customers.”
Most downtown units are offering
concessions right now, ranging from
two weeks to six weeks of free rent,
often depending on where the apart-
ment is in the lease-up phase, said
Ozment.
Outside of those heavily supplied
areas, keep an eye on whether con-
cessions spread and whether multi-
family starts continue to slip – either
in response to softening market con-
ditions or tighter lending at banks,
said Kim Duty with the National Mul-
tifamily Housing Council.
Renewal rates, which are harder to
track across the market, are a strong
indicator for the fundamentals of
certain submarkets, said Ozment. If
there’s higher turnover, it means that
other properties are lowering their
rents and becoming more affordable.
• Investor appeal. An overarching
indicator continues to be Denver’s
investor appeal. “Denver still checks
all the boxes for investors,” said
Ozment. After returning from the
NMHC event, it was clear that inves-
tors still want to be in Denver.
“The year started strong with Red-
Peak selling One City Block to Deutsch
Asset Management,” according to the
Transwestern team. “Sales like this
show that foreign and out-of-state
buyers are still very attracted to Den-
ver because of its consistent job and
population growth, quality of life and
strong fundamentals. While some in-
state buyers are holding off on mak-
ing purchases, cap rates will remain
low, as out-of-area buyers continue to
see value in investing in Denver.”
Many investors follow demograph-
ics. Denver’s ability to draw young
professionals to the city bodes well
for the multifamily market, said Matt
Vance with CBRE.
“The consensus calls for Denver’s
economy to remain a top performer
going forward,”Vance said. “Our
relatively low cost of living positions
Denver as one of the most attractive
markets for growth – particularly true
in the tech industry.”
Job growth is the driving force
behind the apartment industry. “Colo-
rado should continue to see decent
job growth, but the pace will likely
slow over the next few years,” said
Williams.
Firms are beginning to find it
increasingly difficult to secure quali-
fied workers, and competition for
talent is particularly acute in the tech
industry. “Continued deceleration in
hiring and employment growth would
negatively impact the demand side of
the multifamily equation,” said Vance.
• Market demand. “Denver is still
considered a strong market for
the apartment business, for many
reasons, including our diversified
economy, attraction of corporations to
move here and overall quality of life,
but massive supply has some experts
concerned,” saidWilliams.
The current cycle’s development
peak will likely occur in 2017, and
thus supply is the most prominent
near-term risk, said Vance.
“There were nearly 25,000 new
apartments build in the last three
years and another 25,000 are cur-
rently under construction,”Williams
said. “Prior to this recent development
boom, it took from 2002 to 2012 to
build that many units.”
Last year, multifamily supply
caught up with the pace of increased
demand, which will result in some
flattening out in 2017, but overall
demand for apartments remains
strong, said Duty.
This is largely due to a combination
of the steady in-migration of new resi-
dents and the lack of available single-
family housing options.
“Despite a desire for many to own,
the supply-constrained single-family
market has elevated prices and many
would-be buyers are finding it difficult
to leave the multifamily market,” said
Vance.
This dynamic doesn’t seem to be
relaxing anytime soon. There are
fewer and fewer places to build
single-family homes within Denver
– many of the ideal infill spots have
been developed, such as Stapleton
and Lowry, said Ozment. And with
condo development still tied up due
to construct-defect laws, the condos
that are being built are priced outside
many first-time homebuyers budgets.
For these reasons, many potential
homebuyers will remain renters.
However, these renters will enjoy
a market that is much more in line
with our long-term averages.
“There will be more choices and
incredible amenities offered with
intense competition as all of these
units come on line,” said Williams.
“The other good news for renters is
that the Denver apartment industry
has been very aggressive about rein-
vesting into their properties. Really
at all levels of apartment communi-
ties, the owners have put in a bunch
of money to upgrade common areas
and update units to remain competi-
tive.” s
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