CREJ - Multifamily Properties Quarterly - July 2015
Metro Denver’s boom in apartment construction has raised concerns that the market could become overbuilt, but with the region’s population-explosion, that fear is likely unfounded. Metro Denver has a population of more than 2.9 million people and a growth rate that has consistently outpaced the national rate every decade since the 1930s, according to the Metro Denver Economic Development Council. By 2020, the region's population is expected to increase to more than 3.3 million people. The influx of people, especially millennials, created demand for additional apartment units, but they come at a high price. The influx of people, largely a result of the region’s attractive lifestyle and the number of available jobs, continues to push rents higher and vacancies lower. The overall average rent for the last 10 years increased from around $800 in 2002 to more than $1,168 this quarter, even though vacancy rates ticked up slightly to 4.9 percent, compared with 4.7 percent during the fourth-quarter 2014, according to the first-quarter Denver Metro Area Apartment Vacancy Survey by the Apartment Association of Metro Denver. More than 19,000 apartment units started construction in 2012 and 2013 – the most the market has seen in more than 40 years – and developers are continuing to build. The redevelopment of Union Station spurred a flurry of multifamily development on the 19.5 acres surrounding the historic building, which now is home to The Crawford Hotel and a variety of restaurants and shops. There’s Cadence, a 219-unit building west of the station; Elan, a 307-unit building; and The Platform, a 288-unit tower. And it is not just Denver’s center that is experiencing the boom. Neighborhoods surrounding downtown such as Cherry Creek, traditionally an enclave of high-end for-sale condos and homes, is seeing apartment projects like the 218- unit Steele Creek at First Avenue and Steele Street pop up. Developers also are flocking to River North, Lower Highlands and Highlands to build apartment communities. Trammell Crow Residential, for example, recently paid $9.34 million for about two acres at West 38th Avenue and Lowell Street for Alexan West Highlands, a 324-unit complex with completion expected in about two years. Land surrounding any of the region’s light-rail stops also is at a premium, with developers furiously building apartment communities for residents who like the idea of ditching their cars and commuting downtown by train. The city’s strategic plan for transit-oriented development takes a system-wide approach to developing a sense of place around rail stops, including residential projects like Garden Court, an affordable housing project under construction near the Yale light-rail station. The influx of people to the region certainly is creating the demand for apartments, but other factors are contributing to the multifamily construction boom. Colorado’s onerous construction defects law makes it easy for homeowner associations to sue developers for faulty work without giving them a chance to rectify problems as they arise. So, instead of building for-sale condos, many developers have turned to apartments, with the intent of converting them to condos after seven years, at which point they can no longer be held liable for defects. Business leaders across the state have tried for years to get legislation passed that would ease the burden of lawsuits against developers, but the bills ultimately were killed in committee. Proponents of revising the law say they expect the fight over defects lawsuits to shift to cities. Lakewood already has passed a measure giving developers and builders a right to repair defects before facing litigation and requiring condominium association boards to get consent from a majority of homeowners, rather than just the majority of the board, before filing suit. Another factor contributing to the surge in apartment construction is the lack of for-sale housing. Many people are choosing to rent apartments because the combination of high home prices and lack of inventory is keeping them out of the ownership market. Nationally, there is a 5.3-month supply of housing inventory but metro Denver has only a 1.28-month supply for single-family homes and 0.81 months for condos, according to a recent report from the Denver Metro Association of Realtors. This is pushing prices up, as the average price for a single-family home rose 4 percent to $420,630 from May to June. Metro Denver’s attractive lifestyle and positive economic climate will continue to draw people to the region, creating even more demand for quality rental housing. The low vacancy rate and rising rents are sure signs that the market has not been overbuilt.