CREJ

4 / 32

Page 4 — Multifamily Properties Quarterly — May 2017
Multifamily property management that puts
your building on a more profitable track.
Like the railroad platform that spins train cars in a new direction,
Wheelhouse Apartments™ repositions your property for increased
cash flow and building value.
Property Management
Leasing & Maintenance
Accounting
Construction Management
Asset Management
Marketing & Branding
Strategic Planning
Wheelhouse Apartments is central Denver’s premier apartment property
management company, helping apartment owners maximize income and
property values through expert property management, innovative marketing
and branding, cost-effective renovations and asset management.
UNIQUE
PROPERTIES
Unique Apartment Group
COLORADO’S PREMIER APARTMENT BROKERS
In partnership with: Call us for a free initial
consultation: 303.518.7406
Part of the Wheelhouse family of companies: Boutique Apartments • Wheelhouse Apartments • Wheelhouse Commercial Management • Wheelhouse Construction
Wheelhouse Apartments • 574 Santa Fe Drive, #110 • Denver, Colorado 80204 •
Market Update
T he Denver housing market’s
consistent double-digit appre-
ciation culminated in 2016 with
increasingly low for-sale inven-
tory (3,878 residential proper-
ties available at the end of February,
the lowest monthly total on record
since 1985) and top honors in Zillow’s
list of “Top 10 Hottest Housing Mar-
kets” for the year, fueled by a surge
of new construction in the area. Fol-
lowing the Great Recession, develop-
ers and investors kept a tight rein on
new residential construction, hoping
to avoid a glut of new housing. Both
single-family and multifamily product
were undersupplied by an average of
8,000 units per year from 2013 to 2015,
as noted by Meyers Research.
This imbalance resulted in home
price appreciation and apartment rent
increases consistently averaging near-
ly 10 percent annually. It is not widely
known that, beginning in fourth-
quarter 2015, trailing vacancy rates for
multifamily product increased for the
first time since fourth-quarter 2009,
marking the start of the Denver multi-
family market’s normalization.
What is the new normal for mul-
tifamily in Denver? For the first time
ever, Denver’s position has elevated
from that of a tertiary city to a tier-one
city, fueled by coastal and global inves-
tors’ interest in Denver’s lower-risk
investing environment. Denver had
two conventional multifamily proper-
ties trade over the $490,000-per-unit
mark – the first time this was achieved
in the market – and Boulder recently
experienced the historic trade of
17*Walnut at $600,000 per unit. Inves-
tors are seeking opportunities and
actively pricing lower yields in lower-
risk investing markets like Denver.
Key fundamentals
have contributed to
Denver’s multifami-
ly investing environ-
ment over the past
few years, including
rising home prices, a
lack of supply, high
median household
incomes, Denver’s
urban resurgence
and its continued
appeal to millenni-
als.
The median home
price for a single-family home in
metro Denver increased 60.9 percent
in nine years (2007 to 2016), while
rents continue to rise throughout the
metro area, up by 2.6 percent over-
all in the last year, according to the
first-quarter Denver Metro Apartment
Vacancy and Rent Survey. It should
be noted that, compared to previous
years, this rental increase is moderate.
Some analysts thought these smaller
increases – year-over-year rent growth
in 2015 was 3.56 percent, then noted
as the lowest increase since 2009 –
indicated the end of the latest boom
cycle when, in fact, moderate rent
growth is the new normal as the mul-
tifamily market begins to stabilize.
Rising prices are indicative of
increasing demand; in the case of
housing, the undersupply of new
product coupled with high migration
produced the high prices and cre-
ated a seller’s and owner’s market.
As a result, the delivery of 3,246 new
units in the first quarter was quickly
absorbed without increasing the
vacancy rate (at 5.7 percent overall) or
lowering asking rents, which increased
slightly to $1,383. This is impressive
considering it was the largest delivery
of units since 2002 during the early
part of the year, normally a slower
time for leasing. Much of the new
multifamily product is comprised of
luxury units positioned in prominent
or up-and-coming urban and subur-
ban markets, which can create a price
barrier for the younger workers mov-
ing to Denver.
With such demand for entry-level,
for-sale product, especially for value
price points, why are so few condo-
minium developments underway?
Attached housing is an obvious entry-
level product and, historically, played
an integral role in Denver’s housing
market appeal. Certainly luxury apart-
ment complexes are underway, and
many of these units would be ideal
condominiums. However, Colorado
has had a hostile construction defects
litigation environment since 2007 that
has inhibited new attached hous-
ing development. This will hopefully
change in the near future.
House Bill 1279 is making its way
through the Colorado Legislature,
recently passing a critical legislative
vote. The bill allows for developers
to address unit owners concerning
any alleged construction defect and
to make a voluntary offer to remedy
the defect. Developers looking to
build these entry-level condos are not
immune to the associated costs. The
average suburban-located, garden-
style apartment community costs
upward of $250,000 per unit to build.
Given the necessary mark-up required
for developers to profit, these units
could cost upward of $300,000, not
including related monthly homeowner
association fees. In spite of the new
legislation, condo development will
continue to be slow, and completed
units will be priced out of reach for
many first-time homebuyers.
Denver’s high quality of life, progres-
sive laws, high median household
income and low unemployment –
reported as 3.2 percent in February, the
lowest for large metropolitan areas in
the U.S. – continue to attract newcom-
ers, and it is reported that in-migration
has added an average of nearly 30,000
new residents annually to the Denver/
Boulder area from 2010 to 2015. Many
of these new residents are millennials,
as noted by the 2016 Mayflower Mover
Study, which ranked Denver third in
the nation for attracting millenni-
als moving from another city. These
newcomers are well educated, and
Denver now boasts the second-highest
percentage of college graduates in the
country, with 40.5 percent of Denveri-
tes having degrees.
One area of concern with the young-
er generation is limited savings for the
necessary down payment for home-
ownership. Denver’s median home
price has risen 88 percent since 2011,
creating a prohibitive barrier to home-
ownership. Depending on education
level and related debt, research indi-
cates that new homebuyers will need
to save for at least a decade to afford
a 20 percent down payment.With this
population unable to save, apartment
demand continues to be high and that
is not going to change anytime soon.
Institutional money will continue to
flow in the Denver metro area and, as
a result, cap rates will remain com-
petitive and investors will continue to
view Denver as a low-risk market on
the rise. s
Andy Hellman
Senior managing
director, ARA
Newmark, Denver