CREJ - Multifamily Properties Quarterly - July 2015
Apartment operators in Denver will enjoy tight vacancy and substantial rent growth this year, despite an expanding construction pipeline, - - making the metro one of the strongest apartment markets in the country. Development, poised to reach the highest pace in more than 15 years, will pose potential headwinds, especially for operators of Class A apartments in the urban core where many residents are looking for a live-work-play environment. Several thousand rentals are slated to come on line by the end of this year, and some periodic increases in vacancy will continue to ebb and flow as new properties lease up. Overall, Denver’s thriving economy will continue to be a draw for young, educated workers, providing an additional lift to the apartment market. This year, Denver’s 20- to 34-year-old cohort will expand 1.6 percent, outpacing the national average fourfold. Also, single-family housing remains unaffordable to many, which will extend the tenure of rental households. Rising apartment demand will push rental rates to grow at one of the fastest paces in the nation. The strengthening economy and rising revenue streams are driving up property incomes and increasing apartment demand as a wide array of investors compete for limited for-sale inventory. Buyers from coastal markets, who are less price sensitive, are searching for assets in central Denver, pushing up prices in the submarket. Elevated investor demand in the northwest corridor also caused a sharp rise in property values. Higher prices in central Denver and closer-in submarkets are driving many local buyers from core areas in central Denver farther out into the suburbs. In the north Aurora submarket, cap rates for pre-1990s built apartments can average in the low-6 to low-7 percent range. By contrast, similar properties in central Denver average roughly 100 basis points lower. Local buyers who prefer high first-year returns are searching in secondary and tertiary cities in Colorado and burgeoning major markets in other states. Nonetheless, real estate investment trusts and institutional buyers remain active, targeting newer upper-tier properties in central Denver and near the Denver Tech Center, where cap rates can dip below 5 percent. Sales velocity accelerated 23 percent for the past 12 months, ending in the first quarter, as additional capital flowed throughout the metro, nearly doubling transaction volume. The overwhelming majority of transactions took place in core Denver submarkets; however, suburban areas are seeing greater buyer interest. Considering the first half of the year, average price per unit across all classes, A through C, was $171,000, with sale prices for some properties upwards of $250,000 per unit. Best-in-class A product is selling at over $300,000 per unit at a high point and averaging over $275,000 per door for properties built after 2010. Many pre-1980s-built properties in the North Lakewood/Wheat Ridge area changed hands at an average of $100,000 per door. Overall, cap rates compressed roughly 30 bps over the past year to the low-6 percent range. The attention that the North Lakewood/Wheat Ridge submarket received from investors last year pushed down cap rates for 1980s and older assets by 50 to 75 bps and into the low- to mid-6 percent range. Buyer demand for suburban assets and high prices will motivate owners who are sitting on the fence to list properties, increasing transaction velocity away from the urban core.