CREJ - Multifamily Properties Quarterly - May 2016
An influx of millennials and strong job growth has propelled apartment rent increases in Denver to among the highest in the nation – but that growth may be hitting a wall as a result of the heavy development pipeline. Denver has been among the brightest stories in a thriving national multifamily sector. Over the last two decades, the presence of Coors Field and gentrification has transformed ugly and (sometimes) dangerous submarkets into high-rent neighborhoods. An influx of jobs in a mix of sectors such as health care, technology and construction helped produce growth in suburbs such as Boulder, Aurora and Centennial. Legalization of marijuana created a new business segment and attracted people for lifestyle reasons. As the city’s job base and population rose, multifamily benefited from the demand. Between January 2011 and first-quarter 2016, rents in the Mile High City rose 54 percent, according to Yardi Matrix. However, after seeing double-digit year-over-year increases in 2014 and most of 2015, rent growth started to stall in fourth-quarter 2015. The average rent in Denver peaked at $1,277 in September 2015 and fell to $1,269 as of March. The year-over-year growth rate dropped to 7.9 percent as of March, which is still high but far below the 13 percent it reached last summer. What happened? Simply, the heavy supply of new luxury apartments is outstripping demand and dragging the entire market average down. More than 8,300 units came on line in Denver in 2015 and another 8,500 units are slated to be completed in 2016. Not only does that represent an 8 percent growth of total stock over a two-year period, but also the product mix is virtually all in the high end of the market, where there is less demand. Jay Rollins, managing principal of JCR Capital, a Denver-based firm that invests in commercial real estate debt, noted that there are a lot of young people drawn to Denver for starter jobs and easy access to marijuana, but they don’t have the means to pay rents of $2,500 and up charged at new properties. “There’s a huge influx of young people, but they’re not big income earners so they end up in working-class units, which have seen a big uptick in rents,” Rollins said. “But those individuals can’t afford the Class A rents. I question the ability of all the Class A apartments to lease up at those numbers.” Our data shows a clear bifurcation between high-end lifestyle apartments and working-class, rent by-necessity units. Year-over-year growth for RBN units remained a sky-high 10.7 percent as of March, compared to 5 percent for lifestyle. With so many luxury units slated to be delivered in 2016 and demand for less expensive apartments likely to remain high, the bifurcation in rent growth is likely to continue for the foreseeable future. That’s not to say that growth is over or even subpar. Projects such as the $7 billion multiyear expansion of the Colorado Science and Technology Park at Fitzsimmons and Marriott International’s $530 million Gaylord Rockies Resort and Convention Center in Aurora will keep producing economic development and jobs and the area’s natural assets and lifestyle will draw young people and wealthy retirees. Rent growth, however, will continue to be constrained by new supply. Our database counts more than 22,000 units currently under construction and 25,000 more units in the planning stage in Denver, so the increase in supply is not going to abate for several years. Consequently, the rates of rent increases are likely to drop to a more sustainable level. Our forecast for 2015 is 6.3 percent rent growth, which is still above the 4.4 percent increase nationally. One option for those priced out of Denver is Colorado Springs, where the average rent is $904, according to Yardi Matrix. Colorado Springs hasn’t seen the type of increases as Denver (up 32 percent between January 2011 and March 2016), but recent growth has been strong (up 8.6 percent year-over-year as of March). Like Denver, Colorado Springs has been growing steadily, an average 1.5 percent annually since the end of the recession, or double the 0.75 percent national average. Unlike Denver, though, apartment supply is not keeping pace. Our research shows the metro area has seen only 2,000 units completed over the last five years combined, and the 476 units that came on line in 2015 added just 1.3 percent to total stock. And not much is in the offing, as just 2,000 units are under construction and 2,500 in the planning stage. Both Denver and Colorado Springs have grown in popularity with investors in recent years. A record $4.2 billion of apartments changed hands in Denver in 2015, split evenly between lifestyle and RBN properties. Colorado Springs saw $423 million of transactions, which is impressive given its size. In recent years, Denver has grown in status to become one of the top secondary markets in the U.S., which is attracting a large number of institutional investors who formerly would have concentrated on core markets. The major institutions have crowded out some local investors who then make their way down the highway to Colorado Springs.