CREJ - Multifamily Properties Quarterly - November 2016
You’ve probably seen the cranes dotting the skyline, and you may have even heard that apartment developers are overbuilding for the current population. As of the third quarter, there were 24,831 multifamily units under construction in Denver and 25,717 in the pipeline. However, in looking at our population forecasts, market dynamics and the current pipeline, I can tell you what JLL’s research indicates: Don’t believe all of the overbuilding hype. • Rising population. Let’s start with our population. It’s no secret that we are experiencing a population boom. According to updated estimates from the U.S. Census Bureau, Colorado’s population grew by nearly 102,000 people in 2015. Denver was ranked No. 1 in U.S. News and World Report’s 2016 Best Places to Live and No. 1 on Forbes’ list of Best Places for Business and Careers in 2016, no doubt due in large part to our growing pool of highly educated labor. The city ranks as the fourth most-highly educated workforce in the nation. With all that educated talent flooding into the Denver area, businesses are understandably following suit. Denver is expected to add 130,000 net new jobs by 2020. • The millennial factor. We know the population is growing, but from a multifamily development perspective, it’s important to look at the demographics of our new neighbors. We saw an average net annual gain of 12,682 millennials every year between 2009 and 2014. All signs indicate that Denver will remain popular among millennials in the near term. Earlier this year, Denver ranked third among U.S. cities as the place Americans under 35 are moving to, according to the Mayflower Co.’s annual survey. This demographic needs housing but, generally speaking, millennials are less able to buy into the city’s increasingly expensive single-family market. Between student loans and less-established credit histories, it is simply harder for them to qualify for a mortgage. That means we’re looking at a large – and growing – population of people who need housing options. With the median home price in Denver approaching $400,000, renting often is the only option. • Lack of affordable housing. Yes, Denver has been on a bit of a building spree the last several years, but here’s the rub: We’ve just been playing catch up – and probably not fast enough. When construction ground to a near standstill early in the recession, we stopped adding the necessary housing units to keep up with our growing population. In fact, since 2012, Colorado is about 55,000 units short (not counting vacant units that were absorbed). Now consider that we added just 25,143 new residences in 2015. It’s perhaps not surprising then that Denver, Boulder and Fort Collins were just ranked No. 1, 2 and 3, respectively, in HousingWire.com’s ranking of housing appreciation by city. This is great news if you’re an owner, but it’s a concern if you’re a member of the city’s growing population of renters we mentioned earlier. It all means there is a serious lack of attainable housing options available to meet continued demand. The city of Denver is aware of the issue and is attempting to address it, at least in part, with a recent linkage fee. While money from the fee will go toward affordable housing initiatives, it also will increase the cost of apartment construction by $1.50 per square foot. City officials say this revenue stream will subsidize the building of about 6,000 housing units over the next 10 years. • Tightening lending industry and rising costs. Which brings us to the pipeline. A tightening in the lending industry and the lack of available construction debt for the multifamily industry indicates that of the 25,717 units currently in planning phases, we will see significantly less come to fruition. After several years where multifamily loans were cheaper and easier to come by, the lending industry now is more closely monitoring its exposure to the multifamily market. Developers have to put more equity down at higher rates with less favorable terms, so deals are becoming less financially viable. Combine that with the increased cost to build right now, and it becomes difficult to see all of those 25,717 units getting built. The multifamily industry is doing its part, but the coming slowdown in the apartment pipeline, the lack of attainable options coming on line and the growing population has the potential to create a housing shortage in the city. • Putting everything in perspective. All that said, Denver still is technically affordable. Stay with me here. The generally accepted federal measurement of housing affordability looks at the ratio of rent to income. No more than a third of median family income should go to housing. Right now in the seven county Denver metro area, the average apartment rent to median family income ratio is 20.5 percent, according to Apartment Insights. So while rents have certainly gone up in recent years, Denver is still affordable compared to other major cities. And that’s something else we’ve become – a major city. Denver used to be considered a secondary or tertiary market, but we’ve moved up. We’re now compared to some of the bigger markets and, when compared to those, we’re still relatively affordable. Over the next year or two, we may deliver more units than we can immediately absorb, but the underlying fundamentals in Denver – lots of young in-migration and great job growth – point toward a need for more and a greater diversity of housing options if we’re going to keep pace with our growth in the not-too-distant future.