CREJ - Multifamily Properties Quarterly - November 2017
It is readily apparent that Denver’s multifamily market has surged in recent years, reaching new levels of strength, stability and growth. Vacancy rates remain below the market’s historical average, sitting at 6.6 percent, despite a large number of deliveries over the preceding three-year period. Net absorption year to date is on pace to break the 10-year high achieved in 2014 (9,189 units of net absorption). Rent growth has cooled slightly in the past 12 to 18 months, but it has been on a strong, positive run since coming out of the 2009 Great Recession. Most believe that the recent slowdown is more of a correction rather than a warning sign. However, it’s important to note how and where this success originated in order to recognize what warning signs might substantially affect them. Upstream of this market growth is a strong foundation of fundamental economic drivers that are laying the framework and positioning Denver for continued, sustainable growth. •Population and demographic shifts. Population growth has been one of the key drivers for Colorado multifamily with the true value coming from the “who” as opposed to “how many.” The answer: millennials and well educated adults. Denver ranks among top cities like Austin, Texas, Seattle, Dallas and Richmond, Virginia, in terms of millennial in-migration to the area. Colorado also is the nation’s second-most highly educated state for residents with a bachelor’s degree or higher, according to the U.S. Census Bureau. In October, Bloomberg released its annual Brain Concentration Index report, which ranked Boulder, Fort Collins and Denver as No. 1, 4 and 10, respectively, in the nation measuring business formation as well as employment and education in the sciences, technology, engineering and mathematics fields. •Job growth and higher wages. The second key driver for apartment market demand is Colorado’s ability to continually add a consistent number of new jobs while maintaining one of the nation’s lowest unemployment rates. Employment gains for the Denver area peaked in 2015 around 4 percent and has moderated slightly since then. Colorado employment increased 2 percent between August 2016 and August 2017, adding 48,800 new jobs. A report by the Brookings Institute listed Denver as a high-performing metro area with large increases in employment for research- and technology intensive advanced industries like information, energy and professional services. Colorado also ranks second, behind North Dakota, in the nation for lowest seasonally adjusted unemployment rate in September. A recent Manpower Employment Outlook Survey indicated that over 30 percent of metro Denver employers would be looking to hire throughout the third quarter (one of the highest rates in years). Large corporations are taking note of Denver’s potential and are investing in its future. In June, Amazon.com announced plans for a second Colorado fulfillment center in Thornton, which will create more than 1,500 full-time, associate-level jobs. Trimble Inc., a GPS-technology company, plans to add hundreds of jobs once its Westminster office is expanded next year. Another important factor spurring multifamily rent growth is the accompanying growth in wages throughout the Denver area. According to PayScale Inc., a Seattle-based compensation data company, Denver tied for second place, with San Diego and Austin, in terms of year-over-year wage growth across 31 major U.S. metros. Area wages grew an incredible 3.5 percent in the second quarter. •Threat of overbuilding in core submarkets. Confidence in future market performance appears high throughout Denver and Northern Colorado, evidenced by the historic number of units either under construction or recently delivered. More units are under construction right now (21,399 units) than in any year since 2000 and is 158 percent above the all-time average. Nearly 12,000 new units are forecasted to come on line in 2018, which is second only to 1973 when 12,300 units were delivered. As of the third quarter, there were more than 10 properties simultaneously in lease-up, with properties targeting the high end of the market seeing slowed traffic and increased upfront concessions. So, at what point is the construction pipeline outpacing the actual demand for new residential units in the area and what warning signs should we start looking for? One key metric to follow is the occupancy of these new projects at delivery. New construction delivering in 2017 has, on average, been occupied at 35.8 percent at the time of delivery, which is below the all-time average of 47.4 percent and a far cry from the nearly 70 percent occupancy at delivery seen in 2014. One encouraging counterpoint to this recent shift is that properties delivering in 2017 are achieving stabilized occupancy much quicker (nine months, on average) than the prior four years.