Denver’s apartment lending fundamentals remain strong

Denver’s skyline is visible from the deck of Centric LoHi.

Christina Grimme
Associate, JLL Capital Markets, Denver

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I ’d like to think I’m not the typical millennial. Can you blame me for skirting the label? There are so many negative associations with Gen Y or, the not-so affectionately termed, “handout” generation. Narcissistic, lazy, entitled: Who wants to claim those characteristics? But like it or not, millennials are having a big impact on the real estate industry today and that impact can be seen here in the Denver apartment market.

In 2014, around the time Denver’s net migration was at an all-time high, nearly 52 percent of total in-migration to metro Denver was millennials. In fact, I moved to Denver from Chicago that same year. And no, I do not miss the Chicago winters. As a 30-something transplant, I wanted to be walking distance to work and in the heart of the action so I ended up in one of the newly built apartments near Union Station. Many of today’s Denver transplants are ages 25 to 35, coming from cities like Chicago, San Francisco, Los Angeles and New York, and doing exactly that. Maybe I’m not so atypical after all.

These young professionals, especially those with discretionary income, are trading a backyard for a nearby park, a bigger kitchen for local restaurants and a driveway for easy access to public transportation and ride sharing. They are pushing off marriage and kids for travel and career opportunities. In my husband’s simple words, “They’re smart.”

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The delay in homeownership is something that is even easier to understand when you consider the Denver housing market. This past February, the average price of a single-family home sold pushed above $500,000 for the first time ever, according to the Denver Metro Association of Realtors. I don’t know many 20-year-olds who can afford that down payment. On top of that, we are seeing new record-low inventory of homes for sale each month. January, for example, kicked off the year with a record-low inventory of just 3,869 homes for sale. Denver Metro Association of Realtors’ March 2018 Market Trends Report shows just 93 active single-family home listings in the Denver metro area under $300,000. In other words, with a population of more than 3 million people, it’s nearly impossible for entry-level home buyers to find affordable housing. Need I add that home prices are growing faster than wages and inflation?

Unfortunately, there’s no end in sight. Housing starts have not begun to make a dent in the severe shortage. And while there has been some recent positive reform for condominium construction in the form of House Bill 1279, a new Colorado law that changes the way homeowners’ associations may bring construction defect claims and something we desperately needed, it will still take time for the sizable projects to deliver.

To add fuel to the fire, as Denver’s entry-level single-family home inventory continues to shrink, our young and educated population continues to grow. When measured among the nation’s largest metros, the Mile High City stacks up nicely in terms of educated millennials. One out of every two millennials is a college graduate. Increasingly, new startups and industry leaders alike find themselves attracted to Denver because of our depth of talented labor. Facebook, BP, Amazon and Charter Communications are all examples of businesses chasing this talent by way of either expanding or establishing operations in our city. This employment growth explains why metro Denver’s unemployment rate hovered below 3 percent for most of 2017.

While there has been talk of oversupply in the apartment market for some time, it’s for all of these reasons that Denver’s absorption has mostly kept pace with deliveries. In 2017, we delivered just over 10,000 apartment units and absorbed just under 7,000.

So, what does all of this mean? Well, it has made our jobs easier. In the last 18 months my team has secured financing for more than a handful of multifamily construction deals across the Denver metro area. It’s an easy story to explain and one that has gained national attention. Out-of-state capital frequently visits us in Denver to specifically seek out multifamily development opportunities. In fact, as coastal market opportunities have dried up, foreign capital is beginning to view Denver as a gateway market. While it’s true that 12 months ago local banks were dialing back on construction lending, the flood gates have opened up again. For projects with easy access to public transportation and major employment hubs, the demand is even stronger. For example, a transit-oriented apartment construction deal we recently worked on was met with several debt options ranging from 50 to 65 percent loan to cost, with pricing as tight as 285 over Libor with partial recourse. Lenders will go as high as 85 percent loan to cost, but more commonly we are sourcing a preferred equity partner to bring leverage from 60 to 85 percent. On top of that, lenders and buyers have expressed interest in prestabilized assets. This willingness to take on the lease-up risk is another example of today’s very liquid capital markets.

Looking ahead, Denver’s quality of life, diversified economy and educated labor force will keep us targeted by employers, residents and investors for years to come. After all, it’s what brought me here, and I’m here to stay. I made these intentions clear when I purchased my first home in the city of Denver. The verdict is still out on whether it beats downtown apartment life.

Featured in CREJ’s April 4-17, 2018, issue

Edited by the Colorado Real Estate Journal staff.