Colorado Real Estate Journal - January 21, 2015
Point. Investors, lenders and buyers have expressed concerns that the number of multifamily units being developed in metro Denver is in excess of demand and this will cause rents to stop growing or recede with massive injections of free rent. There are 19,000-plus units under construction and coming on line for delivery over the next 30 months. Approximately 6,500 of newly completed units were leased through the third quarter of 2014. Projections are that total new absorption in 2014 will be 7,500 units. Additionally, there are 20,000 units in various stages of the planning process. Please note that even with all of this construction activity, rents continue increasing and little or no free rent has infected the marketplace. When comparing all of these units in the pipeline, one can understandably be concerned. Since 1981, the metro Denver market has absorbed a 35-year average of approximately 5,500 apartment units. Last year all of the new construction was absorbed, rents are up and citywide vacancy rates are hovering near 4 percent. However, there are those who will tell you that we have a bubble of new starts that just cannot be absorbed without a cessation of rent increases. Some suggest that rent concessions and higher vacancies will plague our market for years to come. Counterpoint. Using historic apartment absorption numbers is not a valid method of forecasting the balance between supply and demand for this sector of the industry. Instead, a better method is looking at total housing units being constructed vis-avis the housing demand drivers. Colorado has some unique factors since the passage of the construction defects legislation. Virtually no new condo construction is underway and, certainly, there is little or no affordable condo development on the horizon. Thus, r e s i d e n t s must choose between purchasing a home, a townhome or renting. The demand drivers are jobs, population increases and income growth. In metro Denver (excluding Boulder), approximately 34,100 new jobs were created in 2014. Add to that 47,000 net in migration. That factor alone represents housing demand that is in excess of 20,000 units. Income is the third driver and this market continues to support higher than-average personal income. Employment opportunities continue to abound and barring unforeseen event risk, we expect this to continue well into the decade. The CBRE research group has prepared a study on the relationship between housing supply and job/population growth rates. What this suggests is that these demand drivers are now more robust than in past years, thus supporting a higher level of new housing development. It is our opinion that the overall housing market in Denver will absorb at least 20,000 new housing units per year as long as we continue at the same growth rates. Those factors are at least 1.8 percent population growth and approximately 2.6 percent job growth each year. Now, let’s also take a look at a couple of subjective paradigm changes that also impact housing and, in particular, apartments. As long as the existing construction defect legislation remains in effect, we will see little or no new housing stock built in that sector. If and when legislation is put into law that peels back some of the more draconian aspects of construction defect law, we will begin seeing apartments converted into condos. Since the properties being converted will then have a lower basis than what it will cost to build new in the future, we expect that it will be some time before we begin to see large amounts of new condo development. Secondly, there is an entire generation of younger people who have grown up in families with anxiety when their house was either under water or, worse yet, foreclosed. It is clear that the American dream of the 20th century, home ownership, is no longer as influential. Instead, millennials like the freedom of renting an apartment, where it is easy to relocate, following a job, or just the fact that you have no maintenance and no debt. Finally, as in many markets, there is a noticeable shift toward infill housing. Interestingly enough, the submarket that has the most new housing activity is the central business district, which matches this national trend. In summary, total housing units delivered in the past two years equaled about 15,600 per year, which is the 35-year average. With demand is excess of supply, apartment rents and home prices have witnessed strong growth. CBRE is forecasting that overall housing permits will peak out over the next five years, averaging about 20,900 units per year. With demand at approximately the same amount, we foresee a balanced marketplace where supply and demand are close to equilibrium.