A Q&A about the Denver multifamily market

Courtesy Ryan Dravitz

Craig Ratterman
Financial and research analyst, multifamily capital markets, Newmark Knight Frank Multifamily

In October, Newmark Knight Frank Multifamily Vice Chairman Shane Ozment emceed and presented at Colorado Real Estate Journal’s 2018 Fall Multifamily Conference. Ozment, specializing in the marketing and sale of institutional multifamily properties in the metro Denver market, has facilitated over $6 billion in transactions since joining Newmark Knight Frank Multifamily in 2002. I asked Ozment to share some insight and a recap of what he had to say at the conference last month.

What major trend are you seeing in the Denver multifamily market?

Shane Ozment

Ozment: Rising construction costs are beginning to have a significant impact on new multifamily development. Labor shortages and material cost increases have led to a 10 percent escalation in hard construction costs year over year. Compounding the rising cost of development is the lack of core Denver sites still available. Earlier in the cycle, developers were able to build wrap-style and podium-style properties in core locations. Now, those sites are all spoken for and the remaining core Denver sites are smaller and demand more efficient types of high-rise or light-gauge steel construction. High-rise buildings are considerably more expensive to build than wood-framed, wrap or podium structures. All in, the cost to develop a multifamily asset in a core Denver location is over $400,000 per unit. Core locations were being developed in Denver for half of that per-unit cost just five years ago.

How has the national investment community’s opinion of Denver changed over the last decade?

Ozment: Ten years ago, many institutional investors across the country looked at Denver as a flyover city. That is not the case anymore. With the explosion of millennial in-migration and economic opportunities, investors now consider Denver to be a “Tier 1” city, with the likes of Portland, Seattle, San Francisco and Chicago. The surge in multifamily property values reflects this mindset change. In 2010, the average sale price of an apartment unit was $73,000; in 2017, the sale price was $216,000.

What submarket shows the best fundamentals moving forward?

Ozment: I have always been partial to Jefferson County and the western suburbs. The mountains are Colorado’s ocean and “beachfront” real estate will always be in demand. The western suburbs also have high barriers to entry compared to many parts of Denver. Jefferson County and the municipalities it contains have historically been averse to rapid growth in housing stock. The comparatively small supply pipeline on the west side of town creates a competitive advantage for existing properties and new developments that are able to navigate the approval process.

Interest rates have been rising steadily since September 2017. Have you seen this rise in rates translate to an increase in capitalization rates?

Ozment: So far, we have not seen an elevation in cap rates despite the rise in interest rates. I would attribute this to a surplus of capital chasing fewer deals on the market. Buyers are still very bullish on Denver and highly competitive bidding has kept cap rates suppressed. However, if rates continue to climb, it is inevitable that we will see cap rates increase as well – we are getting very close to that tipping point and could see cap rates start to creep up next year.

Denver has seen an uptick in large-scale condo developments over the past year or two. Do you think this will have an impact on the multifamily market?

Ozment: There has been a real lack of condo supply in the market for some time now. A steady flow of for-sale condo product is necessary for a healthy housing market, so it is great to see some new inventory in the pipeline. That said, the condo supply pipeline is still only a fraction of what it needs to be to fulfill the market’s demand. The majority of new condos in Denver are priced so high that they really aren’t attainable for most first-time home buyers. Overall, I don’t see the current condo supply pipeline having a meaningful impact on the Denver rental market.

What worries you about the Denver multifamily market?

Ozment: Affordability is a bit of a concern, although Denverites still pay a smaller percentage of their take-home pay on rent than people who live in most coastal markets. Average rents in Denver have increased 61 percent since 2011. While this has been great for real estate owners, it has put pressure on renters across the metro area. Fortunately, I think we are seeing some positive occurrences that could alleviate this pressure. Supply of new apartment units is helping to balance out the overwhelming demand the market has garnered over the last several years. Additionally, wage growth has outpaced rent growth in Denver over the past 12 months as we are finally seeing sustained low unemployment translate to increased pay.

What excites you about the Denver multifamily market?

Ozment: One of the most exciting aspects of the Denver apartment market is the quality of the newly constructed assets. Denver renters have great options to choose from, both in terms of interior finishes and amenities. Clean, modern design using high-quality materials – like quartz countertops and plank flooring – have become standard. The finishes in new apartment communities are nicer than the finishes in most for-sale homes. Swimming pools and fitness centers at apartment communities look like those at resort hotels or a high-end fitness club. I have been blown away by the quality and thoughtfulness that goes into the projects around town. These fantastic housing options that cater to the needs of our city’s growing population have allowed Denver to become the burgeoning city that it is today.

Featured in CREJ’s November 2018 Multifamily Properties Quarterly

Edited by the Colorado Real Estate Journal staff.