CREJ - Multifamily Properties Quarterly - November 2016
Demand for rental housing is not slowing and, for the next several years, the industry will continue to thrive, especially in Denver. I maintain that there is more demand forthcoming than the Mile High City has previously experienced. The prosperity of Denver’s apartment market can be narrowed down to the main indicators of population and population growth. Denver experienced a substantial amount of growth as of late, yet the rental market has not realized much of this growth. Denver has been in the top-five cities in the country for population growth for a handful of years, helping make Denver a top apartment market. However, there is a portion of Denver’s population that still remains untapped. This yet-to-be unleashed demand factor is living with its parents currently. The overall impact of the millennial generation has been well documented. Many of these individuals between the ages of 18 and 34 are still – or back – living at home, and there are a great deal of them. The U.S. Census Bureau’s American Community Survey recently noted that in Colorado, 24.6 percent of millennials are living at home. With the number of millennials in Colorado approaching 1.3 million, this equates to roughly 320,000 potential renters in Colorado who have yet to enter the market and most live in metro Denver. To put this number into perspective, metro Denver’s apartment inventory currently totals 320,000 units. The millennial generation has transformed traditional ideas of how and where to live and has overtaken baby boomers in total population in metro Denver. Millennials are not looking to settle down like previous generations; the average age of marriage is 28, where it was 21 in 1960, and the average student debt of a 2015 graduate is $37,172. Apartments offer the freedom for the desired lifestyle, including travel, no home maintenance and no long-term commitments to a specific location. This is not another typical cycle. Instead, this is the beginning of the reshaping of how young Americans live. Today, the average cost of a home in metro Denver is $425,921, making home purchase inaccessible for many. The American dream no longer consists of the suburbs, two-plus children, a golden retriever and a white picket fence. For many, priorities of how and where they live centers on convenience, socialization and overall lifestyle. Generations coming of age today are defining the new American dream, and it is constantly evolving. No other genre of real estate is better prepared for these adaptations than apartments. The largest and, potentially, most influential generation, Gen Z, has just begun to make its mark on society. This group of after-millennials (ranging in age from roughly 4 to 17) is beginning to graduate from high school and is more in touch with technology than any group before it. This generation will be more mobile, more adaptive, more conscience of lifestyle and will continue the evolution of the housing world that millennials started. In addition to new requirements for future homes (netzero emission development, excellent locations, built-in tech, etc.), we will see an even more drastic manipulation of the historical trends that developers have used to help determine what and when to build. Historically, absorption in Denver has been plus-or-minus 4,500 units per year in relation to roughly the same number of units built per annum, or a 1:1 ratio. This, however, is changing. We are now seeing higher demand, more in line with 1.25 units absorbed for every one unit built. This means that demand is exceeding supply on a historical basis by nearly 1,000 units per year. I argue that this trend is both very real and is working its way north of that number with every year that passes. The vacancy rate in metro Denver was expected to increase to more than 6 percent for two years now, but this has yet to happen. Today, we remain at a 5 percent average vacancy rate. There are a number of influences that contribute to this, but what will remain at the core of demand is population and population growth. Denver is an amazing place to live, it is an internationally recognized destination and we are experiencing unprecedented growth. Our city is adapting to the shifts in culture and influences injected from new and maturing generations. Organically, Denver has what many cities are struggling to create – quality of life. The amount of construction in Denver today is a necessity. From a historical perspective, the total number of units under construction can appear startling; however, in reality, housing is being created for that silent populous waiting to rent.