Page 20
— Multifamily Properties Quarterly — October 2015
C
oming out of the recession, the
Denver multifamily market began
an incredible run of rent gains –
a streak so unprecedented that
the only thing Denverites have to
compare it with is the Colorado Rock-
ies improbable push
to the 2007World
Series. In January
2010, average effec-
tive rent for the
Denver metropolitan
statistical area was
$828, according to
Axiometrics.Today,
that number is
$1,364 – an increase
of nearly 65 percent
over five years.
Median household
income, however,
has been on a dif-
ferent trajectory. In
2014, MHI for Denver
was $66,870, accord-
ing to U.S. Census.
Compare this with
a MHI of $58,732 in
2010, which pres-
ents an increase of
just under 14 per-
cent.The difference
between 65 percent
and 14 percent is
monumental.
The gap between
rent growth and
income growth
resulted in a flight
to affordability in
metro Denver, with
Class C apartments
being the beneficiary.
Annual effective rent
growth for Class C
properties is 13.1
percent, which is
higher than Class
B, 11.1 percent, and
Class A, 7.6 percent.
Occupancy tells a similar story, with
Class C at 96.8 percent, which is higher
than Class B at 96 percent and Class A
at 95.3 percent.The difference in per-
formance between urban and the less
expensive suburban properties adds
further evidence, with 11.7 percent
annual rent gains for suburban proper-
ties, which is more than double the 5.4
percent for urban properties.
It’s clear that the issue of affordabil-
ity is having an impact on the rental
market, which raises the question: How
will today’s pricing affect tomorrow’s
supply? It’s an important question for
property owners and developers.
Looking at historical unit mix
trends, we can see that developers are
responding by building smaller units.
From the 1990s to the current decade,
developers have increased the percent-
age of studios built six-fold. Over each
of the last three decades, we’ve seen
the percentage of two-bedroom units
decline while studios and one-bedroom
units increased.
Digging a little deeper, we can pin-
point some notable examples of this
shift. Denver’s central business dis-
trict, the submarket with the highest
average rent per unit, has responded
accordingly – 73 percent of units deliv-
ered since 2013 have been studios and
one-bedroom units, according to Apart-
ment Insights.
The Denver Tech Center followed
suit; in 2014 and 2015, the DTC saw six
projects deliver 60 percent studios and
one-bedroom units. Of those six, two
projects stood at 70 percent studios
and one bedrooms, with another top-
ping out at 80 percent.
Perhaps the most notable example
of this shift isTurntable Studios, which
is a redevelopment of the old Hotel VQ
and Denver’s first project with market-
rate units smaller than 350 square feet.
Micro units (typically ranging from
275 to 400 sf) first started popping up
in high-density, expensive metro mar-
kets like San Francisco, Seattle, Boston,
Washington, D.C., and NewYork, but
today are found in less-likely metros,
such as Des Moines, Iowa, Columbus,
Ohio, and Omaha, Nebraska.
These units typically rent on a
dollars-per-month basis for 20 to 30
percent below conventional units, even
though the rents per sf are much high-
er. From large to small markets, there
is a demand for smaller units. It’s a
price-point play for many renters, and
it’s clear that the issue of affordability
reaches well beyond Denver.
WhileTurntable Studios is the first of
its kind in Denver, it certainly won’t be
the last.This is a new trend, so natu-
rally there are skeptics questioning
the exit for micro-unit investments 10
years down the road. However, even if
rent-to-income ratios in Denver regress
to 2010 levels, the migration is clear;
the demand for affordable units will
drive occupancy for micro units from a
price-point perspective.
According to the 2014 Urban Land
Institute report, “The MacroView on
Micro Units,” a survey of micro-unit
renters showed 86 percent of respon-
dents indicated price as a priority in
the initial leasing decision. Additionally,
24 percent of respondents from a sur-
vey of conventional unit renters indi-
cated they would be interested or very
interested in renting a micro unit with
73 percent of respondents ranking price
as the No. 1 or No. 2 reason they would
choose a micro unit over conventional.
It’s clear that many renters see an
economic benefit to micro units, but
also developers are economic benefi-
ciaries. Because of the relatively fixed
cost linked to kitchens and bathrooms,
micro-unit projects cost 5 to 10 percent
more per sf to develop than conven-
tional projects; however, the 25 percent
price per sf rent premiummicro units
typically achieve more than offsets the
added cost.
As the number of micro-unit projects
grows, developers are creating a new
market and value network – two key
components of disruptive innovation –
for lower-income renters.That’s not to
suggest that one day new construction
will consist of only micro units; rather,
we should expect a greater diversity
in housing options moving forward
as projects with smaller units help
combat market affordability concerns.
“Affordability” is a relative term, howev-
er, and can be applied to high-income
households as well.
According to the U.S. Census 2014
American Community Survey, 30.8 per-
cent of households in the metro Den-
ver area have incomes of $100,000 or
greater, ranking Denver 25th out of 381
MSAs for the highest percentage. Fall-
ing below Denver’s 25th spot are MSAs
such as Los Angeles, Miami, Philadel-
phia and Chicago – markets where the
portion of households earning $100,000
or more is smaller than in Denver, yet,
according to Axiometrics, effective
rents are anywhere from $115 to $795
per month higher than in Denver.
Additionally, the 2014 ACS breaks
down Denver’s renter households into
segments based on household income,
with the highest income segment being
households earning $75,000 or more.
Households in this segment outnum-
ber lower-income segments, making up
22.5 percent of all renter households. Of
the renter households earning $75,000
or more, only 3 percent are described
as rent burdened (households contrib-
uting 30 percent or more of income
toward rent), the lowest percentage of
any household income segment.
With all the talk over rents getting
too high, there’s still a sizable portion
of the rental market readily equipped
to absorb higher rents.This, of course,
is good news for developers and inves-
tors, as there’s a wide range of invest-
ment options, from the lower end of
the market micro units to the upper-
end Class A core.
s
Market Drivers
Pat Stucker
Managing director,
JLL, Denver
Ray White
Vice president,
JLL, Denver
Travis Hodge
Associate,
JLL, Denver
Charts courtesy JLL
