Colorado Real Estate Journal - March 16, 2016
Last year was one for the Denver-area multifamily housing record book. Investors paid a record $4.44 billion for apartment communities in the metro area last year, topping the previous record set in 2014 by $903 million, a 25.5 percent jump. The record pace is becoming a bit of a broken record, albeit a welcome one for sellers. “During three of the past five years, the metro Denver apartment market has set a record for sales volume,” pointed out Jeff Hawks, vice chairman at ARA Newmark’s Denver office. It’s not unusual for records to be driven by the sale of a handful of core assets, such as properties in downtown, which command high prices. That is true in other asset classes, such as offices, as well as for apartments. However, the apartment market soared to a record level without any high-profile downtown deals skewing the numbers. “We sold three buildings over $300,000 per unit in 2015 and not one of them was a 'core' downtown deal,” said Terrance Hunt, a broker with ARA Newmark. That could change this year. "I estimate that we will see three or four downtown sales this year and these deals will sell at record prices,” Hunt said. “This could be the year Denver breaks through the $400,000-per-unit level,” Hunt said. While no core downtown properties sold last year, Shane Ozment, a partner with Hunt, Hawks and Doug Andrews for the past 15 years, has witnessed the rapid appreciation of suburban, garden-style properties. “In early 2015, there had never been a garden-style, suburban apartment property that sold for over $220,000 per unit,” Ozment said. “In the past six months, ARA Newmark brokered sales for $228,000, $253,000 and $260,000 per unit. “And in January of 2016, we closed Outlook Littleton for $289,000 per unit,” Ozment said of the new high-water mark for that type of property. But it’s urban communities that command the highest price. For example, in late 2015, the ARA Newmark team sold One Observatory Park, a high-rise adjacent to the University of Denver, for $387,324 per unit. That represents the most ever paid for a non-downtown apartment property in Denver. One reason that apartment units cost more today is because they are increasingly expensive to build. Mike Zoellner, who has built thousands of units in the Denver area during the past decades, understands that all too well. "When I built my first apartment property in metro Denver, our cost was $25,000 per unit for an ‘A’-quality building,” said Zoellner, president and CEO of Denver-based RedPeak Properties. “Today, an ‘A’-quality building would cost over $250,000 per unit to build,” Zoellner said. ARA Newmark also celebrated a record year in 2015. The Denver office of ARA Newmark accounted for 46.2 percent of the total dollar volume in sales in 2015. “Our office closed $2.05 billion in apartment sales in 2015 and $1.45 billion in 2014,” Hawks said. To put that in perspective, ARA Newmark closed $3.5 billion in apartment sales in two years, which is almost equal to the $3.93 billion in sales from 1990 to 1999, when 113,478 units traded hands. Last year, the total sales volume was about 12 percent higher than the entire decade of the 1990s. The main difference between the 1990s and now is the price per unit. The average price per unit in 1990 was $34,154, ARA Newmark’s research shows. Last year, the average price per unit paid by an investor was $135,283, a 296 percent jump over 15 years. Apartment values have risen far above the inflation rate. In today’s dollars, the price paid for an average apartment unit in 1990 would be $61,909, when adjusted for inflation. One buyer who has witnessed the increase in apartment values rise is Ed Anderson. “Like in other parts of life, the one that got away is the one you remember most and I have a few of those investments,” said Anderson, principal of Connexion Asset Group, a Colorado-based investment company. He recalls working with Hawks to buy two properties in 1990. One was priced at $3.1 million and he offered $3.05 million. He lost the sale to a buyer who paid the asking price. “Jeff (Hawks) currently has that property listed for $42 million,” Anderson said. Anderson shouldn’t feel bad about walking away from what could have been a 1,255 percent return if he paid the original asking price and held on to the property for 15 years. He is far from alone. “I have hundreds of stories like that over the last 40 years in the brokerage business,” Hawks said. What was true in 1990 is true today, if you take a long-term view. “My usual response to a buyer protesting about an asking price is, ‘Which one of my overpriced listings from 2010 would you want now?’ To make money in apartments, all you have to do is buy and hold on,” Hawks said. That doesn’t mean that apartment prices can’t, or won’t, go down. Indeed, the painful memories of the Great Recession are still fresh for many. During that stretch, which began in 2007 and bottomed in the spring of 2009, prices collapsed and investors had little appetite for Denver area apartments for a few years. In retrospect, of course, that was a great buying opportunity. The bounce back is what longtime observers of the market, like Hawks, expect. “Never in history has Denver’s residential real estate market went down and stayed there,” Hawks said. However, what is true in Denver is not necessarily the case in other markets across the country. “You have to be in a market that is growing,” Hawks said. “The demand for housing is directly related to population growth,” he said. “Denver, along with many major cities in the U.S., seems to have a ‘long runway’ due to the inmigration and internal population growth,” Hawks said. Demographics are on the side of continuing rising apartment values, he said. “Colorado has nearly seven kids an hour turning 21 and six people an hour moving from out of state,” Hawks said. “That translates into demand for housing,” Hawks said. Many of them are members of the millennial population, a group bigger than the baby boom generation, he noted. The Metro Denver Economic Development Corp. estimates that 833,000 of Denver metro's population of more than 3 million are between the ages of 17 and 33. Nationally, 35 percent of those millennials are still living at home. "This means that there are more millennials living at home in Denver than there are apartment units in Denver,” Hawks said. Andrews, also a vice chairman at ARA Newmark, agrees. Although there have been recent concerns about overbuilding, there may not be enough units to meet future demand. “Think about it,” Andrews said. “Where will they all live?” He noted there are currently 18,000 vacant units on the market, which seems like a lot. But if every millennial living in their parents’ basement decided to rent an apartment, the demand would overwhelm the supply, according to Andrews. While the sexy, high-profile sales often make the headlines, there is a much larger investment appetite for older, value-add deals. “Investors are not solely focused on new properties,” Hunt said. “Many investors are buying and selling apartments built in the 1970s and ‘80s,” Hunt said. “We are seeing record sale prices and record rents in the older assets,” Hunt said. “A majority of our buyers, over 85 percent, are looking for value-add opportunities, and they are finding a lot of these opportunities in older assets,” he said. There were 109 properties built between 1970 and 1990 that sold in 2015. One area experiencing significant appreciation is Capitol Hill. The popularity of downtown Denver and the eclectic nature of older assets in Capitol Hill have drawn not only renters but also investors, according to Andy Hellman. Hellman, along with Justin Hunt and Robert Bratley of ARA Newmark, sold 46 properties in the last 15 months, Of those, 23 are in the Capitol Hill submarket. “It used to be all local, private owners in this submarket,” Hunt said. “Now we are seeing larger investment groups, out-of-state investors and even institutional investors” interested in those properties, he said. RedPeak Properties, in addition to renovating the old 1600 Glenarm tower in downtown Denver and developing the One City Block community in Uptown and the Seasons of Cherry Creek, also has been an aggressive buyer of older properties. During the past five years, it has acquired 850 units in central Denver neighborhoods, such as Capitol Hill. Whether developing or buying, RedPeak’s strategy is the same. “Our strategy has been to get in front of the demand. Cherry Creek, downtown, Uptown and Capitol Hill,” Zoellner said. “Those areas are highly walkable and where we believe the people want to be,” Zoellner said.