Colorado Real Estate Journal - March 18, 2015
Cary Bruteig set the stage on the stage in front of the 700 or so real estate experts who attended the recent 2015 Multifamily Development & Industrial Conference & Expo, sponsored by the Colorado Real Estate Journal. Bruteig, principal of Apartment Appraisers & Consultants, showed slide after slide and recited statistic after statistic illustrating the incredible strength of the economy and the record-breaking year the Denver-area apartment market experienced in 2014. To put the gangbuster year in perspective, another speaker at the event held at the Inverness Hotel Conference Center, Jeff Hawks, a principal of the Denver office of ARA, noted that the $3.4 billion in apartment sales last year was greater than the total apartment sales volume from 1990 to 2001. Last year, apartment rental rates in the Denver area grew by more than 10 percent. That was twice what the developers on CREJ panels had projected. Indeed, studies presented by Bruteig and Hawks showed only the Bay Area cities of San Francisco and San Jose showed bigger percentage gains than the Denver-area apartment market did last year. The growth was so spectacular that Bruteig noted that no one could have predicted it (although Hawks chimed in that he had called it.) The big question, however, was whether last year’s incredible growth could continue this year. Given that there are about 20,000 units in some stage of planning or construction and another 20,000 in the pipeline, it is unlikely, Bruteig said. Of course, not all 40,000 will open this year. Last year, the market absorbed about 8,000 units. If 10,000 units are added to the market this year and 8,000 are absorbed, that will lead to a bit of an oversupply, Bruteig noted. The added supply might mean the vacancy rate will rise to about 7 percent from around 4 percent, which he noted is not that bad. It also likely means that rental rates will not continue to show double-digit increases this year. Later, when Terrance Hunt, a principal of ARA, posed the question of whether the Denver area’s torrid pace could continue this year to members of an investment panel that he was moderating. “The question is broader than that,” said Norman J. Radow, CEO of the RADCO Cos. He said the apartment market in the Denver area, and across the country, is undergoing a sea change. “There is a fundamental demographic shift occurring in America,” Radow said. He said when veterans returned from World War II, they did three things: They got married, bought a house and started having kids. That’s not the case today, he said. In fact, his office is a microcosm of what is happening nationally, he said. “I have 20 millennials working in my office and only one owns a home,” Radow said. And the 19 renters are in no hurry to buy, he said. “I know this in anecdotal,” he said. But it is important to consider that a typical law school graduate leaves school with $180,000 in student debt. The first job he takes likely pays about $40,000 a year. Huge student debt and low pay is a recipe for a long-term renter, he said. Meanwhile, none of the panel members, who together have developed many billions of dollars of apartments over the past three decades and have weathered many different cycles, think that this year will match 2014. “Of course, we thought it was going to slow down last year and it really didn’t. We projected 5 percent rent growth and it hit 10 percent,” said Luke Simpson, CEO of Denverbased Grand Peaks Properties Inc. While he said he is “relatively optimistic” about this year, he is not expecting anywhere near 10 percent rent growth in 2015. Bill Stoll, senior vice president of Steadfast Cos., which only recently entered the Denver market, also is cautiously optimistic. “We are a little late to the game here,” Stoll said. “We might have been too conservative … As Norm (Radow) said, there is still tremendous demand out there. Millennials are unable to buy.” Also, seniors increasingly are looking to rent, as opposed to buying, when they sell their big, single-family homes. “They don’t want to take care of their homes and large yards anymore,” Stoll said. Seniors, he said, will provide sort of a “shadow market” for apartment demand, he said. Tom Barta, chief operating officer of Denver-based Griffis Residential, agreed that demand will continue to be strong. “But as Cary’s data shows, there is an unprecedented new supply coming on the market. I’m also a little concerned about affordability,” as rents continue to skyrocket, he said. He said he wouldn’t be surprised if rents rise a modest 3 percent this year and “vacancy rates bump up 1 percent a year.” Following the conference, Hunt said the biggest takeaway from the conference “was just how resilient the Denver apartment market is. I’m also impressed by how many new players are entering the Denver market, who never considered us before.” He noted that for the past three years, only the San Francisco and San Jose markets have been showing greater percentage gains than Denver. “But it’s important to remember that our market is still much more affordable than those markets,” Hunt said. “In San Francisco, the average unit rents for north of $4 per square foot. Their rents are twice our rents,” Hunt said. The members of CREJ’s conference development panel noted that they would rather continue to own their existing apartment product in the Denver area and have only sold reluctantly. Because there are fewer sellers on the market and more buyers, prices will likely continue to rise this year, while the number of units sold will decline, Hunt said. Can rents rise by 10 percent this year? “It’s really hard to say out loud that you think rents will go up another 10 percent this year,” Hunt said. “On the other hand, no one a year ago was predicting a 10 percent increase for 2014,” Hunt said.