CREJ - Multifamily Properties Quarterly - July 2015

Denver thrives as a top investment market

Denver is a top choice for multifamily investors looking for opportunities to expand portfolios and push returns. A number of economic factors have created a “perfect storm” that has effectuated record rent growth, driving investor demand in the Denver multifamily market. A combination of robust employment growth, lack of single-family housing supply and a shift in demographics strengthened Denver’s apartment market, making it a top choice for multifamily investors. Despite new supply coming on line to test the viability and strength of the market, Denver’s apartment market should continue to perform with rent growth and strong occupancy.

Record job growth. The first factor contributing to the strength of Denver’s apartment market is the strength of its workforce. Colorado outperformed the U.S. from an employment perspective since 2010. At its most recent peak in 2012, job growth in Denver hit 3.6 percent. In 2014, job growth was 2.9 percent – still 80 basis points above the national average. That equated to 48,000 new jobs in 2014. Patty Silverstein, chief economist for the Metro Denver Economic Development Corp., said Denver will create another 45,000 jobs in 2015. The robust job market is attracting outsiders to move to Denver. Forbes ranked Denver as the No. 6 fastest growing city in America, with a net migration of 30,629 in 2014, and another 30,879 forecasted this year.

Rising home prices. Another factor is the lack of affordable for-sale housing pushing would-be-buyers into absorbing more apartment units. According to the Denver Metro Association of Realtors, May ended with only 5,657 active listings. That equates to a housing inventory of 1.28 months, compared to an average 5.3-month supply of housing inventory in other markets throughout the U.S. This low supply is driving up median home prices, which hit $359,000 in May. Since 2008, median home prices have increased 54 percent.

While Denver historically is viewed as an affordable housing market, the median multiple rose to 5.25 in 2015 from 3.63 in 2008, per Demographia. The median multiple is used to compare housing affordability between markets, and is calculated by dividing the median home price by the median household income. A median multiple over 5.1 is considered “severely unaffordable.” This precipitous rise in home prices created a gap in the cost of renting versus buying. According to the Wall Street Journal and Deutsche Bank, Denver is one of the cities where renting is significantly cheaper than buying, where a renter in Denver spends 76 cents for every $1 a buyer spends on housing per month. An analysis by Moran & Co. compared the average monthly rent within each of the 28 Denver submarkets to the average monthly principal, interest, taxes and insurance payments for the median home price within a one-mile radius of the center point of each submarket. As the table indicates, on average for the Denver market as a whole, it is 24.85 percent cheaper to rent versus own.

As the affordability of homes has decreased in Denver, homeownership rates have, in turn, trended downward as people turn to apartments to fill their housing needs.

Shifting demographics. There also has been a significant demographic shift in metro Denver that is contributing to lower homeownership rates. Between 2007 and 2013, the millennial population in Denver increased 57 percent. In 2013, millennials accounted for 30.5 percent of the metro Denver population (compared to 27.5 percent across the U.S. in 2013, per the U.S. Census Bureau).

Studies report that millennials are less likely to be homeowners than young adults of previous years because of marriage. According to whitehouse.gov, the median age at which young adults marry has steadily increased since 1950, when men married at 23 and women at age 20. In 2013, the median age for marriage was 29 and 27 for men and women, respectively. In fact, in 2013 only 30 percent of 20 to 34 year olds were married, compared with 77 percent in 1960.

Further, millennials prioritize flexibility in location decisions, particularly to pursue job opportunities in the improving economy. Renting versus buying helps to provide this flexibility.

The last big shift in demographics in metro Denver comes from baby boomers retiring and entering the rental market. Boomers are increasingly choosing to rent instead of own, in order to eliminate home maintenance and to be closer to work, cultural centers, restaurants and parks. A 2013 report by the Joint Center for Housing Studies at Harvard University estimated that 2.2 million seniors aged 65 and over will enter the national rental market by 2023 – about one-half of the total estimated renter growth in that time. In Denver, boomers (born between 1946 and 1964) make up a sizeable portion of the population – approximately 23 percent in 2014, or 705,000 people (per Metro Denver Economic Development Corp.).

Demand Keeping Pace with Record Supply According to Axiometrics, as of February, Denver had the second highest annual effective rent growth in the U.S., at 12.7 percent. Reis forecasts this will continue throughout the year, with Denver stepping into the highest-ranked rent growth in the U.S., adding another 9 percent.

Meanwhile, metrowide vacancy has been declining for the past seven years, and currently stands at 4.3 percent despite new supply above historical levels. Since 1985, Denver delivered an average of approximately 4,000 units per year, but in 2013 and 2014, 7,170 and 9,135 units were delivered, respectively.

Another 13,900 units are scheduled for delivery this year.

Job growth also creates demand for apartments. For every 4.7 new jobs created, there is demand for one apartment unit, per Axiometrics. With 45,000 new jobs forecasted this year, Denver should absorb almost 10,000 units through job growth alone. So while we may see vacancy drift up slightly to 5 percent or even 6 percent, which is a more long-term stabilized level, rents will continue to grow.

Given the continued expansion of Denver’s workforce and new job creation, the lack of supply and affordability of for-sale homes, and the shifting demographics of renters-by-choice in metro Denver, the apartment market is poised to continue its impressive performance with strong occupancy and rent growth. Investors should continue to flock to Denver as a top market for apartment investment opportunities.