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Page 14 — Multifamily Properties Quarterly — August 2017
D riven by strong in-migration
and job growth, the Denver
area apartment market con-
tinues to attract multifamily
investors. But, as pricing con-
tinues to rise, many would-be investors
are finding it harder to beat out the
competition. As a result, shrewd inves-
tors are expanding their investment
criteria and taking a closer look at
product that is older, smaller or further
from the downtown core.
With over 27,000 apartment units
under construction in metro Denver,
Denver is expected to break the record
for most deliveries in a calendar year,
per Apartment Insights. A large portion
of the development pipeline consists
of Class A luxury units, and as rents in
metro Denver have risen over 60 per-
cent in the past five years, these units
are becoming harder for Denverites to
afford.
Despite the large supply growth, the
Denver market is, by many accounts,
still experiencing a shortage of hous-
ing. Attaining housing that is relatively
affordable is especially difficult – at the
end of June, there were only 475 active
listings of single-
family homes priced
below $300,000 in
the entire metro
Denver area, which
is home to over 3
million people.The
same demand-and-
supply imbalance for
attainable housing is
taking place in the
apartment sector
as well, as vacancy
for Class C proper-
ties has dipped to
just 3.3 percent, per
Axiometrics June 2017 report.
The numerous apartment market
tracking resources tend to vary in their
performance statistics, but the thing
they can all agree on is that Class C
properties are outperforming Class
A by a significant margin. Apartment
Insights pegs vacancy for Class C
properties at 4.46 percent, Class B at
5.47 percent, and Class A at 6.86 per-
cent. As for rent growth, Apartment
Insights again confirms the discrep-
ancy between Class A and Class C
performance, with
Class C at 4.43 per-
cent annual increase
compared to Class
A at 2.04 percent
increase in gross
rents year over year.
Class B rent growth
is close behind at
4.17 percent annual
increase, but the
overall message
is clear – working-
class housing still is
in extremely high
demand.
Since the recession, the Denver apart-
ment market has experienced activity
and performance like never
be sure, Denver has cemented its place
on the short list for the top markets
for investors to place capital. Plenty
of capital has found a home within
the Denver market, but the amount of
capital still out there searching for a
home is staggering.The amount of dry
powder held within closed-end private
real estate funds stands at $246 billion,
according to Prequin’s second-quarter
update. North American-focused funds
account for 59 percent of global dry
powder, or $145 billion.
With so much capital to deploy, it
makes sense for many fund manag-
ers to only look at deals that are above
a specific dollar amount or unit count
threshold.The fear among those tasked
with putting all that money to work is
that if they can only take down bite-
sized chunks at a time, then they’d just
be sitting on piles of cash. It stands to
reason that larger properties have been
the primary focus here.The result: 48
percent of apartment properties in
metro Denver with 200 units or more
have changed hands at least once in
the past five years.The majority of
these properties were purchased either
with the intent of making value-add
improvements or on the heels of a
major value-add renovation.
The result of all this recent activity
is that the Denver market has been
picked over, and large-scale, value-add
opportunities are extremely difficult to
find.This presents a problem for value-
add investors who still want to be in
Denver.The solution, however, may be
right under their noses. Investors will-
ing to look at smaller-sized assets will
find a wealth of opportunity.
For assets with less than 200 units,
only 27 percent of the inventory has
changed hands over the last five years.
Furthermore, 79 percent of buildings
in this category are considered Class C
product, representing a potential value-
add opportunity. In fact, it’s hard to find
a Class A product with less than 200
units as only 3.5 percent of the inven-
tory is considered Class A.
If you’re a value-add investor and
you’re still not convinced that you
should at least consider smaller assets,
then consider the fact that proper-
ties with less than 200 units outweigh
properties with 200 units or more by a
factor of 8.5.The cherry on top is the
fact that these smaller Class C proper-
ties are simply performing better due
to the current market dynamics.
More properties, more transactions
and better performance – there’s sim-
ply more opportunity in this smaller
space. For the investors constantly
describing how hard it is for them to
hit their returns at today’s pricing, it’s
time to take notice. V
Craig Kalman
Vice president,
multifamily, JLL
Capital Markets,
Denver
Investor Insights
Travis Hodge
Vice president,
multifamily, JLL
Capital Markets,
Denver
For assets with less than 200 units, only 27 percent
of the inventory has changed hands over the last
five years. Furthermore, 79 percent of buildings
in this category are considered Class C product,
representing a potential value-add opportunity.