CREJ - Multifamily Properties Quarterly - February 2017
The commercial real estate market experienced a strong year in 2016, with economic momentum expected to carry into 2017. Apartment construction in the Denver metro and Colorado Springs has been consistently increasing, and this trend is expected to continue in 2017. The current strength in the job market will continue to support apartment absorption over the coming year, with expanding construction and an influx of new residents persisting through 2017. Despite job gains in the Denver metro throughout last year, a slight slowdown in 2017 is anticipated, with 41,500 jobs expected to be added, down from 46,000 jobs in 2016. With a continued increase in construction, vacancy may rise to 5.5 percent this year. However, the rise in homeownership costs in Denver will contribute to the increase in apartment construction and absorption, signaling a positive outlook for investors. Throughout 2016, job growth increased nationally, and metro Denver and Colorado Springs have reflected this trend and continue to look positive for 2017, despite some tightness in the labor market and a slight step down in growth. In spite of a certain level of market uncertainty, vacancy remains low, particularly in Class B and C properties, and apartment absorption continues to show strength. Denver, in particular, has been experiencing a construction boom and this is not expected to slow in 2017. Job growth, along with costly and limited single-family home options, are pushing households toward apartments as homeownership costs continue to rise and outpace wages and rental costs. This trend promises growth in apartment absorption through 2017, and circumstances have been driving a boom in construction with around 30,000 units added over the last four years. Vacancy decreased slightly in 2016, but is expected to moderately increase this year as construction continues to rise. Close to 11,900 apartments are expected to be added in 2017. Nationally, apartment construction in 2017 will reach its highest level in over 30 years. Households turning to rental options over ownership will continue to bring demand for apartments, and millennials – the portion of the population with the highest propensity to rent – are further supporting this trend by providing a continual flow into the workforce. Although the Denver area sees a consistent influx of new residents, currently it is experiencing a somewhat tighter labor market. Positive job growth sustained household formation in 2016. However, market uncertainty following the election is likely to cause some turndown, with just a modest expansion expected in 2017, according to an article written by Aldo Svaldi, “Colorado Economy Facing Headwinds in Coming Years.” Projected job growth in 2017 will be 2.9 percent, or 41,500 jobs, which is slightly down from 2016’s numbers. In Colorado Springs, job growth is expected to remain largely positive, according to the University of Colorado Springs Economic Forum, according to a Gazette article written by Wayne Heilman. The metro’s housing market also is expected to remain robust. Colorado Springs ranks consistently high in job growth within the state, and growing technology, science and math-skilled industries continue to attract skilled labor into the area, according to a Vectra Bank 2016 report. The slight labor shortage Denver and Boulder are experiencing may affect Colorado Springs’ economy, and job growth could potentially slow within the next year or two. At the end of 2016, the area’s unemployment rate fell to 3.5 percent and local payrolls have shown growth over the last 12 months, a positive sign for the coming year. With this improvement comes higher consumer confidence, according to Heilman, and an expected boost to the local economy. With the vacancy rate in Denver expected to remain below 2000 levels, increased construction has resulted in significant interest from multifamily investment buyers. Household formation will remain steady in Denver and Colorado Springs, and investors can expect to see sustained demand for rentals over homeownership. Decent competition in transaction activity will keep prices high, and private, local buyers are particularly active in the market. Suburban areas will supply upside potential for buyers, as Class B and C buildings are in high demand. Low vacancy levels support healthy rent growth in the Denver area and allow investors to capitalize on net operating incomes and property values. Sellers are reinvesting in higher-yield opportunities in other metro locations as well as Colorado Springs. In spite of some market uncertainty as 2017 kicks off and a slowdown in job growth, apartment construction and absorption remain healthy in metro Denver and Colorado Springs. Investors can expect to see vacancy levels remaining low and an increase in rental rates, at around 3.5 percent. The intersection of high ownership costs and increasing apartment construction will keep absorption high, offering both sellers and buyers a strong market through 2017.