Multifamily market cools to steady, sustainable pace

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After years of double-digit rent growth and tight occupancy rates, both figures are expected to see only moderate increases in 2017.

Entering 2017, the rapid acceleration of Denver’s multifamily market seems to be cooling. Yet, it’s not doom and gloom but, rather, a settling back onto familiar ground.

Before diving into what experts around the industry are saying, here are some current statistics to keep in mind for the seven-county Denver metro area, according to Cary Bruteig with Apartment Appraisers & Consultants:

  • 9,800 units were completed in 2016.
  • 25,382 units in 112 properties are under construction, as of the end of January.
  • 26,884 units are proposed in projects as of the end of January.
  • 52,266 units are in the total pipeline (units under construction plus proposed).

The numbers tell a convincing story. If we continue to add units to the market, eventually we’ll hit an equilibrium of units vs. renters. However, Denver’s unprecedented in-migration throws a wrench into the equation – we don’t know the actual need today, what it will be in a few years or what millennials will desire for their housing as they age.

A trend toward higher vacancies and slower rent growth solidified over the last few quarters, according to Apartment Insights’ fourth-quarter 2016 statistics and trends summary. In addition, absorption slowed, rents decreased and sales were down in the fourth quarter, according to the report. But it was still a record year for sales volume and prices.

In mid-January, the Apartment Association of Metro Denver announced that rents across metro Denver decreased by the largest dollar amount in the 36-year history of the report, and it was the second quarter in a row that the average cost of renting an apartment in Denver decreased.

Average rents for nearly 120,000 Denver apartment units decreased from $1,371 this summer to $1,347 in the fourth-quarter, the report said. Median rents remained flat at $1,329. Rents decreased and vacancy increased in all six of the counties covered in the survey – Adams, Arapahoe, Boulder/Broomfield, Denver, Douglas and Jefferson counties, according to the report.

So, what does it all mean? Experts from across the industry shared their expectations for the coming year as well as offered guidance on what to watch to gauge the market’s health.

Market statistics. Absorption, vacancy, occupancy and rental rate growth all contribute to the perceived health of the multifamily market. As units continue to come on line in 2017, Bruteig predicts that vacancy will continue to rise.

But experts were quick to note that vacancy and absorption in Colorado typically follow a seasonal pattern. Vacancy tends to push up in the winter months and then decrease April through October, said Shane Ozment with ARA Newmark.

“Denver has always had a seasonal nature to its absorption,” said Tom Wanberg and John Blackshire with Transwestern. “We will have a clearer picture of where the downtown market stands by July.”

After years of double-digit rent growth and tight occupancy rates, both figures are expected to see moderate increases – much more in line with their long-term averages.

Downtown Denver, which witnessed more than half of the new multifamily development in the past few years, may see negative or flat rent growth. “There’s just no way around it, because you’re going to deliver all these units,” said Ozment.

However, Ozment predicts that some specific neighborhoods, such as the Highlands, Lower Highlands and Golden Triangle, will continue to see rent growth. And he anticipates the suburbs will see 3 to 5 percent rent growth. The suburbs enjoyed double-digit rent growth from 2010 to 2015.

Many of the ideally located, older buildings have been updated this cycle and are reaching a threshold for high-dollar amount. Before this ’80s product can increase more, the newer product will need to increase rents, said Ozment.

Going hand-in-hand with stagnant or decreasing rent growth is the rise in concessions.

“Many experts believe 94 percent is the magic line for occupancy to affect upward pressure on rent,” said Mark Williams with the Apartment Association of Metro Denver. “If occupancy dips below 93-94 percent in Denver, you typically will see much more competitive discounts and concessions to attract customers.”

Most downtown units are offering concessions right now, ranging from two weeks to six weeks of free rent, often depending on where the apartment is in the lease-up phase, said Ozment.

Outside of those heavily supplied areas, keep an eye on whether concessions spread and whether multifamily starts continue to slip – either in response to softening market conditions or tighter lending at banks, said Kim Duty with the National Multifamily Housing Council.

Renewal rates, which are harder to track across the market, are a strong indicator for the fundamentals of certain submarkets, said Ozment. If there’s higher turnover, it means that other properties are lowering their rents and becoming more affordable.

Investor appeal. An overarching indicator continues to be Denver’s investor appeal. “Denver still checks all the boxes for investors,” said Ozment. After returning from the NMHC event, it was clear that investors still want to be in Denver.

“The year started strong with RedPeak selling One City Block to Deutsch Asset Management,” according to the Transwestern team. “Sales like this show that foreign and out-of-state buyers are still very attracted to Denver because of its consistent job and population growth, quality of life and strong fundamentals. While some in-state buyers are holding off on making purchases, cap rates will remain low, as out-of-area buyers continue to see value in investing in Denver.”

Many investors follow demographics. Denver’s ability to draw young professionals to the city bodes well for the multifamily market, said Matt Vance with CBRE.

“The consensus calls for Denver’s economy to remain a top performer going forward,” Vance said. “Our relatively low cost of living positions Denver as one of the most attractive markets for growth – particularly true in the tech industry.”

Job growth is the driving force behind the apartment industry. “Colorado should continue to see decent job growth, but the pace will likely slow over the next few years,” said Williams.

Firms are beginning to find it increasingly difficult to secure qualified workers, and competition for talent is particularly acute in the tech industry. “Continued deceleration in hiring and employment growth would negatively impact the demand side of the multifamily equation,” said Vance.

Market demand. “Denver is still considered a strong market for the apartment business, for many reasons, including our diversified economy, attraction of corporations to move here and overall quality of life, but massive supply has some experts concerned,” said Williams.

The current cycle’s development peak will likely occur in 2017, and thus supply is the most prominent near-term risk, said Vance.

“There were nearly 25,000 new apartments build in the last three years and another 25,000 are currently under construction,” Williams said. “Prior to this recent development boom, it took from 2002 to 2012 to build that many units.”

Last year, multifamily supply caught up with the pace of increased demand, which will result in some flattening out in 2017, but overall demand for apartments remains strong, said Duty.

This is largely due to a combination of the steady in-migration of new residents and the lack of available single-family housing options.

“Despite a desire for many to own, the supply-constrained single-family market has elevated prices and many would-be buyers are finding it difficult to leave the multifamily market,” said Vance.

This dynamic doesn’t seem to be relaxing anytime soon. There are fewer and fewer places to build single-family homes within Denver – many of the ideal infill spots have been developed, such as Stapleton and Lowry, said Ozment. And with condo development still tied up due to construct-defect laws, the condos that are being built are priced outside many first-time homebuyers budgets. For these reasons, many potential homebuyers will remain renters.

However, these renters will enjoy a market that is much more in line with our long-term averages.

“There will be more choices and incredible amenities offered with intense competition as all of these units come on line,” said Williams. “The other good news for renters is that the Denver apartment industry has been very aggressive about reinvesting into their properties. Really at all levels of apartment communities, the owners have put in a bunch of money to upgrade common areas and update units to remain competitive.”

Featured in CREJ’s Multifamily Properties Quarterly.

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