Colorado Real Estate Journal - November 4, 2015
Investors are on pace to buy a record $4 billion-plus in Denver area apartment communities this year; vacancy rates may rise with about 45,000 rental units under construction or in the pipeline; and rents are likely to continue their doubledigit annual increase. Those were just a few of the highlights more than 570 developers, brokers, property managers, architects, title insurance executives and others in the apartment industry learned at the recent 2015 Fall Multifamily Development & Investment Conference and Expo. The conference on Oct. 20 at the Inverness Hotel & Conference Center kicked off with Cary Bruteig providing a slide show and commentary of national and local graphs that sliced and diced apartment and economic data by just about every conceivable metric. “Everything is great, but for how long?” asked Bruteig, owner of Apartment Appraisers & Consultants. Bruteig was a sponsor of the conference, along with the Colorado Real Estate Journal and ARA Newmark. With rental rates up an “incredible” 12 percent during the past 12 months, and the building boom exceeding historic averages and what would be expected with population growth, Bruteig’s advice to developers and investors was to “take some chips off the table.” He said, “Now is not the time to go all-in,” as far as investing in new developments, especially in and near downtown Denver, where most of the growth is occurring. Indeed, at one point he displayed an interactive graphic with dots showing planned apartment communities, which completely obscured downtown because there were so many of them. Panel members speaking at the conference ranged from still extremely bullish to somewhat cautious on Denver’s apartment market, but no one is anticipating continued double-digit rental growth that has been occurring for several consecutive years. Terrance Hunt, a broker with ARA Newmark, said the market already has topped $3 billion in sales this year, and will reach a record $4 billion by the end of 2015. Indeed, Shane Ozment and Chris Cowan, brokers at ARA Newmark, both noted that many investors bidding for apartment communities and land are new to Denver. Bruteig said that rents today are the highest ever, not only in nominal dollars, but also in real dollars. “Rents are above previous peaks, but apartments are larger and nicer, so I’m not sure they truly are higher than they were when adjusted for inflation,” Bruteig said. On a percentage basis, rents are growing faster for older product than newer construction, he noted. Also, typically renters are paying an average of 19.7 percent to 27.7 of their income, depending on how you measure it, on rent. That is below the 30 percent or so that is considered the maximum consumers should pay for rent or on a mortgage. It also is far below what many pay in rent in major cities on the West Coast and East Coast. Hunt said one trend that bodes well for the multifamily market is that homeownership has fallen to about 60 percent from a high of about 70 percent. He said the area also is benefitting from its transit-oriented developments and the air train that will open between Union Station and Denver International Airport next year. “And we’ve seen DaVita doubling down on Denver (with its corporate headquarters expansion) and we will see other companies moving their headquarters here,” Hunt said. “We think the market is going to be a little bifurcated, with the most pressure above the $2,000” a month rents, said Bobby Hutchinson, who is director of investments for Denver-based RedPeak Properties. Hutchinson, who spoke on the investor panel, said he anticipates rents will rise 2 percent to 3 percent for the high-end, luxury apartments newly constructed in downtown, while rents will rise 5 percent to 6 percent for properties with rents in the $1,100 to $1,500 range. Still, Denver‘s multifamily market will continue to be one of the best in the U.S., said Norman Radow, CEO of the RADCO Cos. “Denver is the epicenter” of everything that is driving a bull market in rental across the country, such as millennials who can’t afford or don’t want to buy a home. Denver also benefits from its weather, quality of life, investment in infrastructure and its nearby universities, he said. However, a slowdown in rental increases is coming at a time when labor costs are going through the roof, with no end in sight, according to a number of panel members. The cost of building has doubled since 2010, said Tim McEntee, director of Wood Partners. He said there is such a labor shortage that “you are lucky to have 200 workers” on a site that should have 300 workers. McEntee, who spoke on the developer panel, said that he had hoped the downturn in the oil industry would mean more workers would leave high-paying jobs in fracking fields and return to residential construction, but he hasn’t seen it. Early in the conference, architect Jeffrey Sheppard, who spoke on the design panel, challenged developers to think outside of the box, when designing apartments. He noted that an editorial piece he wrote last April (“Denver is a great city, why the bad buildings?”) received more than 3,000 email responses. “Meaningless, uninspiring structures that feature mere surface variation rather than genuine innovation seem to be the zeitgeist of the day,” he wrote about Denver in the editorial. Denver’s zoning, he said, has “loopholes” that allow for construction that does not enhance the urban fabric. He said he met with one developer that wanted to build a housing development that would have created a 5-foot-wide sidewalk flanked by 50-foot walls that would have “destroyed” the neighborhood. Instead, he came up with an idea that incorporated standalone micro-units in the front and stacked townhomes at the back that were an asset to the area and just as profitable for the developer. He and Paul Campbell, president of Kephart, also pointed to Block 32 in RiNo, designed by James G. Johnson of Johnson Nathan Stroh, as an example of a multifamily community that works well with the neighborhood. Later, Bruteig asked members of the developer panel how they felt about design, noting that it can drive up the costs in an industry where prices already are escalating. W. Jeff Booth, vice president of development for Embrey Partners Ltd., which is developing an apartment community in Ken Caryl Ranch, said design is only second to site selection. And Darren Fisk, founder and CEO of Forum Real Estate Group, said it is important that the design, as well as the amenity package, appeals to the market it will serve. He noted that they developed the Veranda High Pointe near Interstate 25 and Hampden Avenue, and Kent Place at University Boulevard. They are about two miles apart, but they couldn’t be more different, yet are both highly successful, because they appeal to their core demographics so strongly, he said.