CREJ - Multifamily Properties Quarterly - January 2015
Strong job and population growth helped Denver achieve a record year in the multifamily sector in 2014. Records were broken in aver- - age rent, occupancy, absorption and rent growth. Which, of course, led to record construction (over 19,000 units currently). Can 2015 be as strong as last year? Only time will tell, but our guess is it will be one of solid performance, strong investor activity and continued positive fundamentals. Supply is high, but so is demand. Most of the construction is centered on three areas: downtown Denver, the southeast business corridor and the northwest corridor. All three areas are major employment centers and have connectivity through current or future light rail. Denver is growing up from the inside out. Denver, the 14th largest multifamily market in the U.S. by existing units, absorbed more than 8,100 units over the past three quarters, placing it among the top 10 markets for net absorption, according to CBRE Econometric Advisors. As strong demand outpaced new supply, the metro vacancy rate registered a low 3.4 percent in third-quarter 2014, down 30 basis points from a year earlier, and well below the most recent peak of 7.9 percent vacancy in 2009. This year, Denver will post its strongest annual rent growth in 20 years of nearly 8 percent, beating the previous record year of 2000, when rent inflation reached 6.8 percent. Local rent growth also outpaced most U.S. markets. Denver ranks third in the U.S. for rent growth over the past 12 months, behind only Oakland and San Jose, California. The average apartment rent in Denver as of third-quarter 2014 was $1,169 per month, according to CBRE Econometric Advisors, and rents in central Denver are 1.3 times the market average. Rent growth is expected to moderate in 2015 as demand works to keep pace with new deliveries, but will remain above the historical average of 2.7 percent (1994-2014). Apartment completions in 2014 will be second only to 2002, when more than 10,000 units were delivered. Since 2010, central business district apartment unit deliveries have accounted for 20 percent of all Denver completions, compared with 12 percent in the 2000s and 5 percent in the 1990s. Apartment Insights reports 19,900 units under construction in Denver as of third quarter 2014 and another 20,100 planned or proposed. Further, 26 percent of the planned units are located in Denver’s CBD.
Denver ranks second in the U.S. for growth in millennial population between 2009 and 2012, according to the Brookings Institute. Millennials moved to Denver because of the job availability and for the high quality of life, and they bolstered occupancy primarily in urban locations. The shift of demand to the urban core will help alleviate short-term softness in 2015. A high volume of sales in the third and fourth quarters most likely will lead to a record year in 2014 once all the sales are confirmed, surpassing each of the past two years, which have been very strong. Since 2011, more than $9.1 billion in multifamily assets have transacted in Denver, according to Real Capital Analytics. 2015 is expected to be another strong year of sales in Denver’s multifamily sector, but likely more reflective of 2011 or 2013 activity levels. Investor interest spread to secondary markets in 2014 and will continue to seek yield in markets like Boulder, Fort Collins and Colorado Springs. Pricing metrics have steadily increased in Denver throughout the current real estate cycle, but significant increases were achieved in 2014. The average sales prices per unit increased 31.8 percent year over year in third-quarter 2014 to $149,000. Third-quarter 2014 also marked the fourth consecutive quarter Denver’s average sales price per unit exceeded the U.S., which is the longest running overage on record. Cap rates compressed a bit in 2014, ranging from the low-6 percents to the high-4 percents (for trophy assets in prime locations). As of third-quarter 2014, the cap rate for all multifamily product registered 6.1 percent, according to Real Capital Analytics. Looking ahead, potential headwinds that will impact the market in the near term include a revision to Colorado’s construction defect laws in 2015. This may pave the way for more condominium construction, thereby providing multifamily dwellers more options to own instead of rent. However, it will be a while before this takes effect. Resurgence in single-family construction is also expected in 2015-2016, providing additional options for Denver’s growing number of households. Lastly, are interest rates finally going up this year? If they do, it will, at the very least, cause a temporary pause in activity, but most likely will not greatly impact fundamentals as long as the increases are slow. The big question is where are we in this cycle? Only one thing is certain: Cycles rarely repeat exactly as those before. Are we in the seventh inning? Most likely, but it may be an extra-inning game. Whatever your analogy, we are in a good place right now and as long as job growth and population growth continue, Denver should continue to perform well and see prolonged interest from the investor world. Investors are particularly attracted to Denver’s strong employment and demographic growth, as well as the mass transit infrastructure improvements and diverse industry base. Denver is truly one of the top non-coastal markets in terms of both attractiveness to job seekers and investors