Page 20
— Multifamily Properties Quarterly — July 2015
Market Driver
Y
ou have probably read many
articles in the Colorado Real
Estate Journal praising the
strength of Denver’s mul-
tifamily market. However,
with 20,000 units currently under
construction and another 20,000
in planning, there have been rum-
blings of oversup-
ply on the horizon.
Approximately
9,000 units were
delivered in 2014
and another 10,000
are expected in
2015. Those deliv-
eries come with
record net absorp-
tion numbers
– 7,325 trailing
12-month annual
absorption in
first-quarter 2015,
topping the previ-
ous record of 7,100
in fourth-quarter
2014. This is well
above the 3,250
average absorbed
over the last 10
years, accord-
ing to Apartment
Insights.
Despite the
record absorption
numbers, multi-
family develop-
ers may finally be reacting to the
abundance of projects in the pipe-
line; trailing 12 month multifam-
ily permits for metro Denver have
declined each of the last two years,
from 8,357 units in April 2013 to
7,711 units in April 2015. Denver’s
effective rent growth of nearly 12
percent in 2014 ranked No. 3 in the
nation, and almost halfway through
2015, Denver is holding the No. 3
spot with an annual effective rent
growth of 11 percent. For a market
that historically averaged 3 percent
rent growth, the recent rent gains
are nothing short of remarkable.
Still, with the number of units in
the pipeline, and permitting above
historical averages, multifamily
investors are begging the question,
“Are we building too much hous-
ing?”
While multifamily permitting
for the metro area has started to
decline, it still stands at more than
double the 30-year average of 3,700
units. However, if we widen our
lens, we see some interesting trends
in the overall housing market. It is
not just rent growth – Denver leads
the nation in home price apprecia-
tion as well. The Mile High City is in
high demand. So, we would expect
to see the same permitting trends
for single-family housing, right?
Not the case. Over the last eight
years, permitting for single-family
detached homes has been below
the 30-year average of 10,000. Those
eight years represent the time fol-
lowing the housing boom’s peak.
However, Denver was not hit nearly
as hard as other metros during the
bust, and it is one of the few metros
where values have surpassed the
peak achieved during the boom.
Considering this, it is not entirely
clear that the question of “too much
housing” is the correct question to
ask.
Going back 30 years, when
accounting for single-family
detached, single-family attached
and multifamily housing, Denver
averaged about 16,000 total hous-
ing units per year. Last year was the
first year since the housing peak
that we permitted a number that
high. In the seven years leading
up to 2014, we permitted roughly
61,000 units. Using the annual his-
torical average of 16,000 as a bench-
mark, we would expect 112,000 per-
mits during that timeframe, which
would leave a deficit of 51,000. Over
that time, the homeownership rate
in Denver plunged from 70 percent
to 55 percent, according to the U.S.
Census 2015 first-quarter report.
That gives Denver the seventh-low-
est homeownership rate among the
75 largest metros. The low home-
ownership rate, however, is not for a
lack of effort on the part of would-
be homeowners. According to the
same U.S. Census report, Denver
had the fourth-lowest homeowner
vacancy rate at 0.3 percent. People
want homes – there simply aren’t
any available.
In the years after the housing
boom’s peak, an interesting thing
happened – Denver’s population
grew by 375,000, an annual rate of
1.7 percent, due in large part by net
in-migration. Population growth
in the metro area is expected to
stay in the 1.6 to 1.7 percent range
through 2020, which is double the
projected rate for the entire U.S. (0.8
percent).
The millennials, of course,
account for a significant portion
of the people moving to Denver.
According to the Colorado Depart-
ment of Local Affairs, with a popu-
lation of 730,000 millennials, they
are now the largest population
group in metro Denver, easily top-
ping generation X and the baby
boomers. Over the next 10 years,
that gap is expected to widen as
Colorado’s State Demography Office
projects millennial net in-migration
at an annual clip of 11,000. It is dif-
ficult to predict where all of these
millennials will live, but according
to a recent study from Urban Land
Institute, only 26 percent of mil-
lennials in the U.S. currently own a
home.
Millennial housing patterns have
become a popular topic, and many
experts believe millennials possess
a lack of desire for homeownership.
According to the same ULI study,
21 percent of millennials nation-
wide still live with their parents
or other relatives. Extrapolate that
percentage for Denver’s millennial
population, and you would have
over 150,000 still living with fam-
ily members. Considering Denver’s
permitting trends after the peak
(2007-2013), our estimated deficit
of 51,000 units, which is below the
historical average, could lead one to
believe the number of millennials
living with relatives is even higher.
The natural progression from liv-
ing with relatives is moving into a
rental.
Even if there were a desire to
own, Denver has very few options.
The median price of homes sold
in Denver is over $311,000 while
median millennial earnings fall
short of $40,000, according to the
Metro Denver Economic Develop-
ment Corp., putting homeowner-
ship out of reach. The U.S. Census
showed Denver as having the larg-
est increase in residents with col-
lege degrees, but for many, getting
a degree means incurring student
debt. Nearly half of millenni-
als nationwide have student debt
averaging $27,000 per person. With
home price appreciation outpacing
wage growth, it may take some time
before millennials can afford to buy
a home in Denver.
There are two issues making mat-
ters worse – the short supply of lots
available for single-family develop-
ment, and a lack of any measurable
condominium development. The
overall rising real estate market
in Denver has boosted land values
across the board, making low-densi-
ty single-family homes at affordable
prices for first-time buyers difficult
to develop. Condo construction is
missing from the equation entirely
due to Colorado’s construction-
defect law.
So, it seems the question we
should be asking is, “Are we build-
ing enough housing?”
s
Pat Stucker
Managing director,
JLL, Denver
Travis Hodge
Associate, JLL,
Denver
Charts courtesy: JLL
