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Page 8 — Multifamily Properties Quarterly — February 2017
Financial Market
D enver has long been regarded
as a one-industry city – min-
ing in the 19th century, fol-
lowed by energy and then
telecomm. But in recent
years, the city developed a diverse
economy that experts believe will
fuel population and job growth for
the next 20 years or more. Den-
ver, today, is a prime example of
an American city whose growth is
driven by the work-live-play neigh-
borhood dynamic that attracts young
professionals and the companies that
seek to hire them. The apartment
market, often a leading indicator of
market trends, is of particular inter-
est to real estate developers, inves-
tors and lenders.
Innovation That Matters, a recent
report from the U.S. Chamber of
Commerce Foundation, 1776 and
Free Enterprise, ranked Denver third
among U.S. cities – behind Boston
and San Francisco – in terms of
its “readiness to capitalize on the
inevitable shift to a digital economy.”
Among the 25 cities studied, Denver
ranked first for quality of life, second
for its well-connected ecosystem,
third for its vibrant cultural foun-
dation and fourth for its ability to
attract college-educated millennials.
Denver has figured out how to
diversify its economy and is on a
strong growth path. The economy
here is where San Francisco’s was
20 years ago. Proof of this long-term
stability is seen in Google recently
developing a three-building campus
in Boulder that can accommodate
more than 1,500 employees.
One reason for
Denver’s appeal is
its business climate,
with low taxes and
incentives for job
creation, employee
training and infra-
structure improve-
ments. But the big-
gest reason is the
city’s appeal to mil-
lennials as a desir-
able place to live, for
its active lifestyle
choices, such as
hiking and skiing,
and for a culture
that values environmental issues.
Transportation is part of the appeal
as well; Google executives note that a
nearby transit hub was a major factor
in choosing its Boulder site.
Denver also is benefiting from a
demographic trend seen across the
country – not only are millennials
staying in apartments longer than
previous generations, but also a
record number of retiring baby boom-
ers also are choosing the walkable
lifestyle that work-live-play urban
neighborhoods offer. Empty nesters
are realizing that their wealth is tied
up in their home equity, and they can
enjoy life by selling the house and
renting in an area with restaurants
and shops. Plus, they don’t have to
make repairs or do lawn work.
To accommodate the wave of
apartment demand, developers have
increased metro area inventory by 13
percent over the past three years and
have seen average rental rates rise to
60 percent above their previous peak,
according to a first-quarter report
from Marcus & Millichap. Yet, multi-
family vacancy rates are at histori-
cally low levels.
Affordability is the main concern
in Denver’s apartment market today.
Owners of B and B-plus properties
have pushed rents 20 to 30 percent,
and they are still 100 percent occu-
pied. But renters are reaching the
limit of what they can afford. As
land prices and construction costs
rise, new projects could have trouble
making their pro-forma numbers. We
are starting to see some concessions
come into the market for Class A
properties downtown. Capital sources
that want a piece of today’s growth
are becoming increasingly concerned
about this downside risk.
Currently, however, apartment
owners and developers still can get
financing at favorable terms. Den-
ver’s apartment market may be one
of the most dynamic in the country,
but the trend toward higher rent and
occupancy can be seen in virtually
every city.
The past year has seen increased
volatility in the commercial mort-
gage-backed securities industry
and a greater regulatory focus on
underwriting quality of commer-
cial real estate loans, resulting in a
slowdown in the pace of lending.
With hundreds of billions of CMBS
loans maturing in the next two years,
there is some concern that supply
of capital will fall short of demand.
But owners of existing multifamily
properties will be able to refinance
without too much difficulty, due to
several relevant factors.
Money is flowing into the U.S. from
around the world, because we are
seen as a safe haven while most of
the rest of the world is less secure
economically. Foreign capital seeks
assets that people in those countries
understand – and everyone under-
stands apartments. Capital inflows
are helping keep interest rates low
on a historic basis, a factor that helps
borrowers gain greater proceeds
when financing or refinancing prop-
erties.
The apartment market is shielded
to some degree against the loom-
ing challenge of CMBS financing
because Fannie Mae, Freddie Mac
and the Federal Housing Author-
ity are offering favorable terms
on development and acquisition/
refinance loans. For instance, FHA
recently reduced the mortgage
insurance premium on affordable
and energy-efficient, market-rate
apartment deals. In addition, early
rate locks on forward-commitment
options are coming back into the
market, eliminating interest-rate
risk for projects in lease up.
In short, the apartment finance
market is on relatively solid ground
to weather any volatility in the capi-
tal markets. As long as demographic
and cultural trends are driving more
people to choose apartments over
homeownership, fundamentals like
rent and occupancy will remain
strong, and capital sources will con-
tinue to seek out opportunities to
fund new and existing properties. s
Charles Williams
Senior vice
president, KeyBank
Real Estate
Capital, Denver