CREJ - Multifamily Properties Quarterly - January 2015
As people flock to Colorado for job opportunities and an improved quality of life, the apartment market has tightened up to the point where rents are rising steadily and investors continue to aggressively pursue any available multifamily properties. It’s no wonder people are converging on Denver. Last year, Forbes.com ranked the city No. 4 on its list of the 10 best cities for job seekers. The state’s unemployment rate stood at 4.3 percent in October, with Denver slightly better at 4.2 percent. Denver also landed on top of Business Insider’s ranking of how each state’s economy is faring, largely because of the 1.2 percent growth in the city’s working-age population and the addition of 66,300 jobs between June 2013 and June 2014. Business Insider ranked Denver as the fifth-best city for entrepreneurs based on access to funds, networking and mentorship opportunities, the local economy and affordability. Investors in the multifamily sector are taking note. In 2013, investors set a metro Denver record with apartment sales of nearly $2.9 billion. They may come close to that volume for 2014, depending on how the fourth-quarter numbers shake out, which come out at the end of this month. But the market could soften in 2015 or 2016 as many of the projects that are under construction are delivered, though many in the industry believe Denver’s market is not overbuilt yet. More than 19,000 apartment units started construction in 2012 and 2013, with most of them delivered by the end of 2014. That’s the most apartments added to the market in such a short time period in more than 40 years. The boom in construction projects in Denver follows a period that saw little development of apartments and now is filling a need that will help the housing market catch up with the demand created by population growth. Downtown Denver is particularly hot, with about 4,000 units under construction, the majority of which surround the Denver Union Station transit and hotel development. Many of the other multifamily projects under construction or recently completed also are along the transit system throughout the metro region. Even with all the inventory added to the market, the vacancy rate continues to drop. It decreased to 3.9 percent in the third quarter of 2014 from 4.7 percent in the second quarter. A vacancy rate of 5 percent is considered normal and healthy. The dropping vacancy rate translates into rising rents. Average rents increased to $1,145 in the second quarter, compared with $1,049 during the same period last year and $986 a year ago. Denver tied San Diego for the highest rent growth in 2013 at 7 percent, according to an analysis of the top 10 markets for apartment investment by National Real Estate Investor.
Developers and investors were quick to enter the multifamily arena, because it’s the sector that has the most access to financing for construction and acquisition. It’s also an alternative to developing condominiums – a risky prospect because of the state’s onerous construction defect law that make it easy for homeowners to sue over property defects. Dropping vacancies, rising rents and increased investor demand are pushing the value of multifamily properties up, meaning the assessments due out in May are likely to rise again. Assessments, conducted every two years, were up as much as 40 percent in some areas in May 2013. New valuations will be based on properties sold between July 1, 2012, and June 30, 2014. By some estimates, prices paid for properties sold during that time frame have increased as much as 89 percent. Though owners will be able to raise rents to cover the increase in property taxes caused by higher assessments, some may choose to sell instead. A steep ramp-up in construction usually weakens a market’s overall fundamentals, but the Denver metro area’s strong economy seems able to absorb the new supply, and it should fuel enough demand for apartments to prevent severe declines in fundamentals in the near term.