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— Multifamily Properties Quarterly — October 2015
T
he vitality and distinctiveness
of the Denver economy are
driving new businesses and
households to relocate to the
metro, propelling apartment
demand at a rate greater than sup-
ply growth. Drawn
by the strong job
market and high
quality of life, new
residents boosted
population growth
in the last year to
more than double
the national aver-
age.
In 2014, employ-
ers filled 52,000
positions. The
strongest jobs gain
was in the con-
struction sector,
which was bol-
stered by a wave of residential and
commercial development. The edu-
cation and health services sectors
followed, creating 9,300 workers.
This year employers are on track to
add another 45,000 jobs, represent-
ing a 3.3 percent hiring increase.
This positive trend in employment
is expected to continue, which will
keep developer optimism high,
drive multifamily demand, and lead
to increases in rents and multifam-
ily asset valuations.
Also contributing to the demand
for apartments is insufficient sin-
gle-family home and condominium
construction, and the high price of
existing homes. Home construction
still is far below its prerecession lev-
els, propelling the increase of home
prices and apartment rents as new
residents seek out living space.
Builder confidence and the con-
struction pipeline expanded under
these conditions, and developers
are anticipated to deliver a record
12,000 or more units this year, or
over 32 percent growth in apart-
ment deliveries since 2014, and a
4.8 percent increase in the total
rental stock. Nearly half of all com-
pletions this year are concentrated
near Denver’s urban core. In 2016,
the majority of new construction
will remain focused in central Den-
ver.
Though there have been a large
number of completions in the
Denver metro, high demand mar-
ketwide for apartments continues
to suppress vacancy levels. At the
market level, average vacancy con-
tinues to defy expectations as the
rates remain on a slow downward
trajectory. That said, vacancy is ris-
ing in areas where development is
heavily concentrated in the urban
core and the tech center, where
average vacancy rose above 5 per-
cent in the second quarter. Vacancy
remains tightest in the older sub-
urban submarkets, where average
vacancy is below 3 percent. Looking
forward, strong housing demand
should prompt a 10-basis-point
drop in vacancy by the end of 2015,
with net absorption close to 12,400
units.
Since 2010, Denver has ranked
among the top major metros for
rent growth, posting annual gains
well above 5 percent. Given strong
apartment demand, many new
complexes hitting the market are
recording short lease-up periods,
enabling the monthly average rental
rate to grow at one the fastest paces
nationwide in 2015.
This, in turn, has curbed conces-
sions with less than 1 percent of
professionally managed apartment
complexes offering concessions.
Tight vacancy contributed to rising
average rents, which are projected
to increase to $1,335 per month in
2015. Rapid population growth and
residential demand will sustain ris-
ing home prices and expedite rent
growth, as single-family home and
condominium construction activity
remains below their previous peaks.
Recognizing these trends, inves-
tors are flocking to the Denver
metro in search of higher first-year
yields than are available for proper-
ties in the primary coastal markets.
Consequently, suitably priced assets
are generating numerous offers,
which escalates prices. The domi-
nant force in the market continues
to be private investors, driving up
deal flow in the $1 million to $15
million range. Going-in capitaliza-
tion rates for this asset bracket
average in the high-5 to high-6 per-
cent range, depending on quality,
renovation potential and location.
That said, low vacancy and rising
income streams will drive up net
operating incomes in the B and C
asset classes, continuing to attract
a wide variety of investors from
across the country. This is demon-
strated in a 35 percent spike in deal
flow and 40 percent surge in total
dollar volume in the metro over the
four-quarter period ending midyear.
Another factor demonstrat-
ing competition within the non-A
Class product is the narrowing gap
between going-in yields among
product classes. Many Class A and
B assets across the metro and Class
C assets in the more desirable loca-
tions are all experiencing going-in
capitalization rates in the sub-6
percent range, with Class B and C
assets attracting investors that are
looking to renovate and increase
net operating incomes, projecting
approximately 20 percent leveraged
10-year internal rates of return.
In the first half of the year, overall
transaction velocity was significant-
ly higher than the same span last
year, as valuations along with the
pending rise in interest rates helped
motivate sellers to expedite their
transaction timelines. However, the
short supply of for-sale inventory
versus buyer demand continues
to intensify competition to secure
assets among private investors,
especially in well-established sub-
markets with less new construction
opportunities.
Additionally, the wealth of newly
built complexes will create oppor-
tunities for institutional buyers.
Both well-funded private equity
and institutional buyers seeking
additional yield likely will focus on
listings in the southeastern portion
of the metro, especially in Centen-
nial and Aurora. Continued aggres-
sive pursuit of assets in these areas
is expected to continue through
the end of the year and into next,
largely due to the expansion of the
metro’s light-rail line that will be
complete in 2016.
s
Market Update
Greg Price
Vice president
investments,
Marcus &
Millichap, Denver
