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— Multifamily Properties Quarterly — July 2015
D
enver is a top choice for
multifamily investors look-
ing for opportunities to
expand portfolios and push
returns. A number of eco-
nomic factors have created a “per-
fect storm” that
has effectuated
record rent growth,
driving investor
demand in the
Denver multifamily
market. A combi-
nation of robust
employment
growth, lack of sin-
gle-family housing
supply and a shift
in demographics
strengthened Den-
ver’s apartment
market, making it
a top choice for multifamily inves-
tors. Despite new supply coming
on line to test the viability and
strength of the market, Denver’s
apartment market should continue
to perform with rent growth and
strong occupancy.
Record job growth.
The first fac-
tor contributing to the strength of
Denver’s apartment market is the
strength of its workforce. Colo-
rado outperformed the U.S. from
an employment perspective since
2010. At its most recent peak in
2012, job growth in Denver hit 3.6
percent. In 2014, job growth was 2.9
percent – still 80 basis points above
the national average. That equated
to 48,000 new jobs in 2014. Patty
Silverstein, chief economist for the
Metro Denver Economic Develop-
ment Corp., said Denver will create
another 45,000 jobs in 2015. The
robust job market is attracting out-
siders to move to Denver. Forbes
ranked Denver as the No. 6 fastest-
growing city in America, with a net
migration of 30,629 in 2014, and
another 30,879 forecasted this year.
Rising home prices.
Another fac-
tor is the lack of affordable for-sale
housing pushing would-be-buyers
into absorbing more apartment
units. According to the Denver
Metro Association of Realtors, May
ended with only 5,657 active list-
ings. That equates to a housing
inventory of 1.28 months, compared
to an average 5.3-month supply of
housing inventory in other markets
throughout the U.S. This low supply
is driving up median home prices,
which hit $359,000 in May. Since
2008, median home prices have
increased 54 percent.
While Denver historically is
viewed as an affordable housing
market, the median multiple rose
to 5.25 in 2015 from 3.63 in 2008,
per Demographia. The median
multiple is used to compare hous-
ing affordability between markets,
and is calculated by dividing the
median home price by the median
household income. A median mul-
tiple over 5.1 is considered “severely
unaffordable.”
This precipitous rise in home
prices created a gap in the cost
of renting versus buying. Accord-
ing to the Wall Street Journal and
Deutsche Bank, Denver is one of the
cities where renting is significantly
cheaper than buying, where a rent-
er in Denver spends 76 cents for
every $1 a buyer spends on housing
per month. An analysis by Moran &
Co. compared the average monthly
rent within each of the 28 Denver
submarkets to the average monthly
principal, interest, taxes and insur-
ance payments for the median
home price within a one-mile radi-
us of the center point of each sub-
market. As the table indicates, on
average for the Denver market as a
whole, it is 24.85 percent cheaper to
rent versus own.
As the affordability of homes has
decreased in Denver, homeowner-
ship rates have, in turn, trended
downward as people turn to apart-
ments to fill their housing needs.
Shifting demographics.
There also
has been a significant demographic
shift in metro Denver that is con-
tributing to lower homeownership
rates. Between 2007 and 2013, the
millennial population in Denver
increased 57 percent. In 2013, mil-
lennials accounted for 30.5 percent
of the metro Denver population
(compared to 27.5 percent across
the U.S. in 2013, per the U.S. Census
Bureau).
Studies report that millennials
are less likely to be homeowners
than young adults of previous years
because of marriage. According to
whitehouse.gov, the median age
at which young adults marry has
steadily increased since 1950, when
men married at 23 and women at
age 20. In 2013, the median age for
marriage was 29 and 27 for men
and women, respectively. In fact, in
2013 only 30 percent of 20 to 34 year
olds were married, compared with
77 percent in 1960.
Further, millennials prioritize
flexibility in location decisions, par-
ticularly to pursue job opportunities
in the improving economy. Renting
versus buying helps to provide this
flexibility.
The last big shift in demographics
in metro Denver comes from baby
boomers retiring and entering the
rental market. Boomers are increas-
ingly choosing to rent instead of
own, in order to eliminate home
maintenance and to be closer to
work, cultural centers, restaurants
and parks. A 2013 report by the
Joint Center for Housing Studies at
Harvard University estimated that
2.2 million seniors aged 65 and over
will enter the national rental mar-
ket by 2023 – about one-half of the
total estimated renter growth in
that time. In Denver, boomers (born
between 1946 and 1964) make up a
sizeable portion of the population
– approximately 23 percent in 2014,
or 705,000 people (per Metro Denver
Economic Development Corp.).
Demand Keeping Pace
with Record Supply
According to Axiometrics, as of
February, Denver had the second-
highest annual effective rent growth
in the U.S., at 12.7 percent. Reis fore-
casts this will continue throughout
the year, with Denver stepping into
the highest-ranked rent growth in
the U.S., adding another 9 percent.
Meanwhile, metrowide vacancy has
been declining for the past seven
years, and currently stands at 4.3
percent despite new supply above
historical levels. Since 1985, Denver
delivered an average of approxi-
mately 4,000 units per year, but
in 2013 and 2014, 7,170 and 9,135
units were delivered, respectively.
Another 13,900 units are scheduled
for delivery this year.
Job growth also creates demand
for apartments. For every 4.7 new
jobs created, there is demand for
one apartment unit, per Axiom-
etrics. With 45,000 new jobs fore-
casted this year, Denver should
absorb almost 10,000 units through
job growth alone. So while we may
see vacancy drift up slightly to 5
percent or even 6 percent, which is
a more long-term stabilized level,
rents will continue to grow.
Given the continued expansion
of Denver’s workforce and new job
creation, the lack of supply and
affordability of for-sale homes,
and the shifting demographics of
renters-by-choice in metro Denver,
the apartment market is poised
to continue its impressive perfor-
mance with strong occupancy and
rent growth. Investors should con-
tinue to flock to Denver as a top
market for apartment investment
opportunities.
s
Investment Market
Alex Bumpas
Senior associate,
Moran & Co.,
Denver
Charts Courtesy: James Real Estate Services
