CREJ - Multifamily Properties Quarterly - July 2015
You have probably read many articles in the Colorado Real Estate Journal praising the strength of Denver’s multi-family market. However, - with 20,000 units currently under construction and another 20,000 in planning, there have been rumblings of oversupply on the horizon. Approximately 9,000 units were delivered in 2014 and another 10,000 are expected in 2015. Those deliveries come with record net absorption numbers – 7,325 trailing 12-month annual absorption in first-quarter 2015, topping the previous record of 7,100 in fourth-quarter 2014. This is well above the 3,250 average absorbed over the last 10 years, according to Apartment Insights. Despite the record absorption numbers, multifamily developers may finally be reacting to the abundance of projects in the pipeline; trailing 12 month multifamily permits for metro Denver have declined each of the last two years, from 8,357 units in April 2013 to 7,711 units in April 2015. Denver’s effective rent growth of nearly 12 percent in 2014 ranked No. 3 in the nation, and almost halfway through 2015, Denver is holding the No. 3 spot with an annual effective rent growth of 11 percent. For a market that historically averaged 3 percent rent growth, the recent rent gains are nothing short of remarkable. Still, with the number of units in the pipeline, and permitting above historical averages, multifamily investors are begging the question, “Are we building too much housing?” While multifamily permitting for the metro area has started to decline, it still stands at more than double the 30-year average of 3,700 units. However, if we widen our lens, we see some interesting trends in the overall housing market. It is not just rent growth – Denver leads the nation in home price appreciation as well. The Mile High City is in high demand. So, we would expect to see the same permitting trends for single-family housing, right? Not the case. Over the last eight years, permitting for single-family detached homes has been below the 30-year average of 10,000. Those eight years represent the time following the housing boom’s peak. However, Denver was not hit nearly as hard as other metros during the bust, and it is one of the few metros where values have surpassed the peak achieved during the boom. Considering this, it is not entirely clear that the question of “too much housing” is the correct question to ask. Going back 30 years, when accounting for single-family detached, single-family attached and multifamily housing, Denver averaged about 16,000 total housing units per year. Last year was the first year since the housing peak that we permitted a number that high. In the seven years leading up to 2014, we permitted roughly 61,000 units. Using the annual historical average of 16,000 as a benchmark, we would expect 112,000 permits during that timeframe, which would leave a deficit of 51,000. Over that time, the homeownership rate in Denver plunged from 70 percent to 55 percent, according to the U.S. Census 2015 first-quarter report. That gives Denver the seventh-lowest homeownership rate among the 75 largest metros. The low homeownership rate, however, is not for a lack of effort on the part of would-be homeowners. According to the same U.S. Census report, Denver had the fourth-lowest homeowner vacancy rate at 0.3 percent. People want homes – there simply aren’t any available. In the years after the housing boom’s peak, an interesting thing happened – Denver’s population grew by 375,000, an annual rate of 1.7 percent, due in large part by net in-migration. Population growth in the metro area is expected to stay in the 1.6 to 1.7 percent range through 2020, which is double the projected rate for the entire U.S. (0.8 percent). The millennials, of course, account for a significant portion of the people moving to Denver. According to the Colorado Department of Local Affairs, with a population of 730,000 millennials, they are now the largest population group in metro Denver, easily topping generation X and the baby boomers. Over the next 10 years, that gap is expected to widen as Colorado’s State Demography Office projects millennial net in-migration at an annual clip of 11,000. It is difficult to predict where all of these millennials will live, but according to a recent study from Urban Land Institute, only 26 percent of millennials in the U.S. currently own a home. Millennial housing patterns have become a popular topic, and many experts believe millennials possess a lack of desire for homeownership. According to the same ULI study, 21 percent of millennials nationwide still live with their parents or other relatives. Extrapolate that percentage for Denver’s millennial population, and you would have over 150,000 still living with family members. Considering Denver’s permitting trends after the peak (2007-2013), our estimated deficit of 51,000 units, which is below the historical average, could lead one to believe the number of millennials living with relatives is even higher. The natural progression from living with relatives is moving into a rental. Even if there were a desire to own, Denver has very few options. The median price of homes sold in Denver is over $311,000 while median millennial earnings fall short of $40,000, according to the Metro Denver Economic Development Corp., putting homeownership out of reach. The U.S. Census showed Denver as having the largest increase in residents with college degrees, but for many, getting a degree means incurring student debt. Nearly half of millennials nationwide have student debt averaging $27,000 per person. With home price appreciation outpacing wage growth, it may take some time before millennials can afford to buy a home in Denver. There are two issues making matters worse – the short supply of lots available for single-family development, and a lack of any measurable condominium development. The overall rising real estate market in Denver has boosted land values across the board, making low-density single-family homes at affordable prices for first-time buyers difficult to develop. Condo construction is missing from the equation entirely due to Colorado’s construction-defect law. So, it seems the question we should be asking is, “Are we building enough housing?”