Colorado Real Estate Journal - October 1, 2014
Matthew Schildt, managing director of Trammell Crow Residential, is bullish on the Denver area apartment market. And not hypothetically bullish. TCR’s Denver office is aggressively developing apartment communities on prime sites in Denver, as well as in Boulder and Colorado Springs. TCR’s Denver office has five apartment communities moving forward in Cherry Creek North, Uptown, Sloan’s Lake and West Highlands, as well as in Gunbarrel in Boulder. When completed, TCR will have 1,472 units, which represents 7.5 percent of the 19,515 units planned, according to Cary Bruteig, principal of Apartment Appraisers & Consultants. Combined, the projects have an estimated value of about $327 million. In addition, TRC is moving forward on the $23 million, 156-unit second phase of its Briargate community in Colorado Springs. “They are really hitting it hard,” said Terrance Hunt, a broker with ARA. “During the last cycle, they were one of the biggest builders here as well as nationally,” Hunt said. “They’re now back at it,” he said. Of course, with more than 20,000 units currently under construction and dozens of communities that were built in the last cycle, TRC is not the only apartment developer active in the metro area. “They are behind some otherdevelopers, such as Zocalo Community Development and Holland Residential, which were in the market much earlier,” Hunt said. “In addition to Trammell Crow Residential, we’re seeing other groups like Wolff, which has done one community but plans others, and Shea Properties being pretty aggressive,” Hunt said. TRC Denver apartment communities, either recently under way or about to start include: • The $47 million, 231-unit Apex 5510 in Gunbarrel in Boulder, which is being designed by JG Johnson Architects; • The $60 million, 369-unit Alexan at Sloan’s Lake, designed by JG Johnson Architects; • The 12-story, 372-unit, $83 million Alexan Uptown, at East 19th Avenue and Logan Street, designed by Kephart; • The eight-story, $55 million, 164-unit Alexan Cherry Creek at East First Avenue and Cook Street, designed by Shears Adkins Rockmore; and • The $82 million 336-unit, fivestory, Alexan West Highlands at Lowell Boulevard and West 38th Avenue, which also will have 33,000 square feet of retail space. It is being designed by Shears Adkins Rockmore. In addition, TRC is moving forward on the $23 million, 156- unit second phase of its Briargate community in Colorado Springs. Kephart is the architect on that development. TRC also builds in areas such as Dallas, Houston, Atlanta and Southern California. “Some of those markets are bigger, so we might have more communities in them, but I think based on fundamentals, Denver is as strong, if not stronger, than any other market,” Schildt said. So why is he so bullish, even in the face of an almost unprecedented level of competition? “We believe that in terms of lifestyle and strong in-migration and positive job growth momentum, Denver will continue to attract our target market renters,” who are well-heeled, professional millennials. The market is not being overbuilt, he said. “We do not believe, as many people believe, that as many units are going to be produced as perceived,” Schildt said. “We look at Cary Bruteig’s pipeline numbers and we agree that 100 percent of them are going to be built … sometime in the next 30 years,” Schildt said. A large number of units on the drawing board will not be built anytime soon, he said. And just as importantly, they are not going to hit all at once, flooding the market with units, he said. “When they do start coming in, they are going to come in in a lumpy manner,” that is, they will not enter the market in a steady stream, Schildt said. Some communities will not get off the drawing board as fast as the developers would like because of trouble getting financing, as lenders and equity investors worry about overbuilding, he said. Even those that move forward, in many cases will take longer to build than anticipated because of labor shortages and the lengthy entitlement process, he said. “Historically, based on absorption, we need a run rate of 6,000 units per year to meet demand,” Schildt said. “Because it takes two years to build a community, we ought to have 12,000 under construction at any time to keep the market in equilibrium between supply and demand,” he said. However, more rental units are needed than historically has been the case because for-sale condominium development is just about nonexistent due to fears of construction defect liability. “So that means we will need a run rate of 7,000 units instead of 6,000, or 14,000 every two years instead of 12,000,” he said. So if about 20,000 units are under construction, as Bruteig reported, that means the market is delivering 6,000 more than needed, he said. At the same time, occupancy rates are around 95 percent to 96 percent, while the average occupancy rate for the market is 93 percent, Schildt said. “Because of the higher occupancy rates, the market can sustain a bit of overbuilding for a couple of years,” Schildt said. However, if construction defect litigation is resolved, it could change the calculus for the number of units needed. “I do think the preference of most millennials is to rent, rather than buy, but that hasn’t been tested because for-sale multifamily developments are virtually nonexistent,” Schildt said. “And, everything in real estate is cyclical, so at some point demand will return,” for condominiums, he said. While some developers team up with one architect, not Schildt. Sometimes it is because a specific architect is most adept and experienced at designing a community for a certain site, he said. “You have to look at every site and how it fits in with that specific neighborhood,” as far as the design, he said. “You can’t just come up with a specific design, put your stamp on it and plop it down on every parcel,” Schildt said. Sometimes, firms just have too much on their plates and are not available, he said. “Other times it is a matter of bandwidth,” Schildt said. “Architects and engineers, like construction firms and all other professional service companies, are so busy they aren’t available to work on a community,” he said. Historically, TRC has been a merchant developer that builds communities, leases them and sells them. “That’s been our bread and butter,” Schildt said. “But we have an organizational goal to find a way to stay involved in the long term for one out of every four projects that we do,” he said. “In Denver, Alexan West Highlands is going to be our first deal that we own for the long term,” Schildt said. “From Day One, our financing has been set up to own that for the long term, which could mean a holding period of anywhere from eight to 15 years,” Schildt said. The Denver office for TRC is in the area and he knows the neighborhood well. “I live on that side of town and understand the high barriers to entry in Highland,” Schildt said. “We believe over the long run there is going to be a push for more people to move to that northwest part of town and in the long run it is going to outperform the overall market. It is such a great neighborhood.” One thing TCR and other developers are increasingly facing is neighborhood opposition and concerns to development. They fear such things as noise and traffic congestion during the construction process, as well as changing the character of neighborhoods. “We are used to building in tight spaces,” Shildt said about the infill developments. The latest example of neighborhood pushback in West Highland, even though the Alexan West Highlands community can be built by right under the U-MX-5 zoning. “I appreciate and am sympathetic to your concerns,” Schildt told about 35 members of the West Highland Neighborhood Association. Schildt said they will do everything possible to minimize noise and construction congestion during the construction period. “All six people in our office either live in this area or (near) Jefferson Park, so we really want to develop something we can drive by and be proud of contributing to the neighborhood,” he said.