March 16-April 5, 2016 —
COLORADO REAL ESTATE JOURNAL
— Page 41
Multifamily Forecast
T
he Denver economy
recovered
quickly
from the effects of the
Great Recession of 2008 and
2009. Within several years
both employment and popula-
tion growth rates returned to,
and even surpassed, the rates
recorded prior to the finan-
cial and economic downturn.
Denver returned to the various
lists of “best of” economic and
investment cities in the U.S.
Developers, being opportun-
ists in the best sense of the
word, took advantage of the
improved economic and mar-
ket conditions. With specula-
tive commercial construction
difficult to finance, developers
initially turned to apartments.
Declining vacancy rates due
to increased demand helped
to justify increased rental rates
and that resulted in a boom in
new construction. Things were
quite favorable for investors,
lenders, developers and bro-
kers. But recently the horizon
has started to show some dark-
ening clouds.
Investment real estate goes
in cycles. Good times are not
guaranteed. Now the Denver
market is showing signs of
reduced demand and an over-
supply of new construction,
especially at the upper end of
the rental rate spectrum. This
also is evident in certain sub-
markets, especially in central
Denver and along the south-
east corridor between the Den-
ver Tech Center and Lone Tree.
Consider, for example, these
indicators:
• Job growth locally, while
still positive, has slowed con-
siderably. During the recov-
ery years, net employment in
metro Denver was increasing
about 2 to 3 percent per year.
That increase fell to under 1
percent in 2015, not bad by
historical standards (and above
the national rate) but still evi-
dence of a slowdown.
• Since employment drives
much of the demand for hous-
ing, apartment net absorp-
tion followed suit. We expect
that actual net absorption in
2015 was about 6,000 units. In
fact, the Apartment Associa-
tion of Metro Denver’s quar-
terly report actually stated net
demand of under 1,000 units
for all of 2015, including a stun-
ning negative net absorption of
over 4,000 units in the fourth
quarter. That level of sudden
decline is difficult to fathom so
we believe the “normal” Den-
ver net absorption history of
6,000 units to have been more
likely for 2015.
• Development is exceeding
demand, causing vacancy rates
to rise. During 2015 developers
added 10,952 new units to the
metro Den-
ver market,
well in excess
of net absorp-
tion, caus-
ing vacancy
rates to trend
upward. This
is particular-
ly evident in
the submar-
kets where
much of the
new
con-
struction has
occurred.
• Softening market condi-
tions put pressure on rental
rates.After years of rising rental
rates (often exaggerated in the
media), many apartment com-
munities are offering conces-
sions and incentives to attract
and retain residents. This is
particularly prevalent in prop-
erties with the highest rental
rates. Conversely, the demand
for low- and moderate-income
housing remains unmet.
So after five years of sunny
skies the storm clouds are roll-
ing in. We expect that the metro
vacancy rate already is in the 8
to 9 percent range, well above
the numbers cited by some
apartment market boosters. To
make matters more challeng-
ing, construction is not slow-
ing. At the end of the fourth
quarter of 2015, there were
18,989 units under construction
in metro Denver and another
20,411 units proposed. Since
that time even more projects
have been announced. In addi-
tion to the 10,952 units com-
pleted in 2015, we anticipate
that another 10,000 units may
be added to the market this
year. Should demand not accel-
erate, metro vacancy rates may
exceed 10 percent by the end
of the year
and could be
much higher
in
certain
submarkets.
D e n v e r ’ s
situation is
not an out-
lier. We are
seeing simi-
lar
trends
evident
in
some of the
n a t i o n ’ s
other popu-
lar growth
markets, including Atlanta;
Austin, Texas; Charlotte, North
Carolina; Dallas-Fort Worth;
Portland, Oregon; Raleigh-
Durham, North Carolina; San
Diego; San Francisco; Seattle;
and Washington, D.C. There
has almost been a feeding fren-
zy among apartment investors,
driving per-unit prices high-
er and resulting in very low
capitalization rates. Of inter-
est, though, is that some of
the nation’s most savvy real
estate investors are now sellers,
not buyers. Sam Zell of Equity
Residential fame, for example,
recently sold a large portfo-
lio of his apartment proper-
ties, including communities in
metro Denver.
Fortunately, the clouds will
ultimately pass and the apart-
ment market will rebound.
It is a simple matter of mar-
ket fluctuations and cycles,
something that occurs with
regularity in real estate. Den-
ver also is well situated for
long-term growth. The citi-
zens have invested in civic and
infrastructure improvements,
including major projects such
as the Regional Transportation
District FasTracks light-rail and
commuter rail system, Denver
International Airport expan-
sion, the Denver Center for the
Performing Arts, History Colo-
rado Center, the Denver Art
Museum, Colorado Conven-
tion Center, the National West-
ern Center and the beautifully
restored Denver Union Station.
Denver attracts newcomers not
only because of its economy
and natural setting but also its
welcoming attitudes.
If we are entering an apart-
ment market bubble, the best
result will be for slow defla-
tion instead of a sudden “pop.”
This means a reduction in
development, something not
yet evident. It is important to
acknowledge the situation and
not fall victim to puffery and
“it can’t happen here” exuber-
ance. Denver’s been through
many cycles in its history and
they will happen again. In the
meantime, we suggest caution
and skepticism.
s
Bill James,
MAI, CCIM
President, James Real
Estate Services Inc.,
Denver
Eric Karnes
Director of market
research, James Real
Estate Services Inc.,
Denver
ties, Internet, phone and TV; and
access to weekly or monthly
housekeeping services. The Cen-
tennial property will have one-,
two- and three-bedroom units.
“They are built like apartments,
so very large in square footage,”
said Redfern. Units will have
walk-in closets; full kitchens with
dishwashers, full-size refrigera-
tors, even silverware; and sepa-
rate bedrooms and living areas.
Acourtyard between the build-
ings will provide fire pits and
barbecues. Guests also will have
access to an on-site fitness facility.
Law Kingdon Architecture is
the architect for the WaterWalk
Hotel Apartments, which will be
built The Law Company Inc.
The property will open in first-
quarter 2017.
s
WaterWalk
Should
demand not
accelerate,
metro vacancy
rates may
exceed 10
percent by the
end of the year
and could be
much higher
in certain
submarkets.
