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— Multifamily Properties Quarterly — October 2015
O
ver the last six months, almost
on a daily basis, I am asked,
“Howmuch longer is this apart-
ment development craze going
to go on?”The questions are
coming from not only buyers and sell-
ers of property but also frommany
everyday friends and acquaintances
who are businesspeople and young
renters alike.
This apartment boom is something
most of us aren’t accustomed to expe-
riencing, and it doesn’t look like it is
losing steam. I reached out to some of
my “old school” real estate mentors
who saw a big boom in multifamily
development in the late ’60s and early
’70s to get their thoughts. Many of
them do not have concerns of over-
building. “Where else are these kids
going to go?” seems to be the common
comeback. In the ’60s and ’70s there
was equilibrium of apartments and
condos built.Today, most renters don’t
have a choice.
It is quite unbelievable that our
state’s lawmakers cannot come to
a suitable comprise on the builder’s
defects laws that protects both the
consumer from real (nonlawyer-driven)
defects and the developer from (law-
yer-driven) frivolous lawsuits.The cur-
rent Colorado laws force the developer
to be personally and professionally lia-
ble for all construction defects, which
created a frenzy of litigation. Lawyers,
developers and banks will tell you that
almost 100 percent of all condomini-
ums built in the last 15 years have or
will encountered litigation.This frenzy
almost stopped for-sale condominium
development in Colorado.With few
options, many consumers are forced
to remain in the renting mode for the
foreseeable future.
The demand to
purchase is in the
marketplace.The
city of Lakewood
and some other
municipalities
passed measures to
promote condomin-
ium development.
However enticing
that may be, many
developers don’t
want to be the first
test case.There are
a few developers out
there who are gear-
ing up to capitalize on the demand but
not many.
There are currently 20,000 apartment
units under construction and an addi-
tional 25,000 units in various stages
of planning in the metropolitan area.
The good news is the units are being
absorbed. A strong, booming Colorado
economy and the outstanding lifestyle
are the driving forces for this demand.
But there are constant concerns that
wages aren’t rising as fast as rental
rates.There has been a slight increase
in recent reports that wages are ris-
ing, but leasing agents will tell you
that many of the renters are paying
housing costs that are reaching 40
percent of their total annual income.
Reports also state that there are more
roommate situations than in the past
because of the high cost of rent.
Construction costs continue to rise.
Concrete, steel and wood pricing is
continuing to rise, which, along with
the labor shortage, is causing concerns
for many developers who are trying
to underwrite development deals to a
financeable yield on cost. Developers,
rightly so, are concerned that there
may be risk in continuing to increase
projected rents in an attempt to jus-
tify construction and land costs.The
continued increase in costs may cause
some slowing in apartment construc-
tion. Also, infill projects on smaller
land parcels are struggling to pencil
due to costs associated with parking.
Although the city planners have
offered limited parking counts in the
zoning code, the market still wants to
see plenty of parking. Smaller zone lots
are more difficult to develop because
the projects needs parking, yet in
order to justify the cost of the land, the
developer must maximize the zoning,
which requires structured parking that
is costly. Developers and contractors
say the price of concrete has skyrock-
eted in the past three months by about
30 percent, which effects underwrit-
ing on many projects, small and large
alike. However, this price increase is
easier to swallow for larger projects
because the cost is spread over more
units. But small infill sites struggle.
Developers and contractors alike
are experiencing frustrations with
most municipalities over the timing
of entitlements and building permits.
Most cities are under such tremendous
pressure with the amount of projects
in their municipalities that getting a
response in a timely fashion becomes
a factor in the underwriting process.
Rising costs and the window of oppor-
tunity will have an impact on some of
these future planned developments.
Capital sources, although becoming
a bit more conservative, still seem to
be abundant for new projects. Denver
remains in the top-ranked apartment
markets in the country. Interestingly,
central Denver core developments
aren’t the only projects attracting
attention, as was the norm a few years
ago. Suburban projects are catching
fire. A year ago, suburban projects had
to have a light-rail component to it to
entice equity. However, that doesn’t
appear to be the case today with
capital sources chasing more subur-
ban projects.
Land prices continue to rise. While
zoning constraints and the number
of units that can be built on the site
will have an impact on pricing, we
continue to see land transactions
that trade on a price per square foot
that, even as a broker, make us won-
der, “What are they thinking?”
When land in central Denver
reached $50 per sf, buyers were
baffled; then, for a time, $100 per
sf seemed to be the norm. Now we
are seeing $150 per sf becoming the
standard on properties not located
in Union Station. Good locations and
favorable zonings continue to attract
developers, but the lack of avail-
ability, especially for larger sites, will
continue to drive demand.
“These are the best of times” is
what a client of mine tells me all
the time. However, many of us still
have 2007 in the forefront of our
memories and continue to ask, how
long will this continue? One of those
old-school mentors of mine told
me he changed his paradigm often
throughout his 70-year career, saying
nothing stays the same.
There is a paradigm shift in Colo-
rado multifamily real estate that has
happened, whether we believe it or
not. We still need to be cautious and
stick with the fundamentals of real
estate because it can sometimes look
too rosy when we are living in the best
of times.
s
Patrick Henry
Senior vice
president,
Cushman &
Wakefield, Denver
Market Update
