How today’s cycle compares to past decades

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While all markets go through construction cycles, the current cycle is producing at historic rates. Images courtesy RealMassive

Mark Daniel Vice president, partner relations, RealMassive, Austin

We’re all aware of what seems to be a building frenzy in the apartment sector in Denver, accompanied, until recently, by strong rent growth. According to the latest report from apartment data provider Axiometrics, “Denver had a similar (to San Francisco) end to 2015, finishing with its lowest year-to-date rent growth of the recovery – though 5.6 percent was fairly robust,” it said. “Things were looking the same through the first two months of 2016, with negative YTD rent growth in January, though a strong March rebound moved it out of the post-recession basement.”

And here are some nuggets from the quarter-one market performance summary on the Denver, Aurora and Lakewood metropolitan statistical area:

  • The market’s annual rent growth rate was above the national average of 4.1 percent.
  • The market’s occupancy rate decreased from 94.7 percent in fourth-quarter 2015 to 94.5 percent in first-quarter 2016.
  • As of April 10, Axiometrics identified 9,056 apartment units scheduled for delivery in 2016, of which, 1,958 have been delivered. As a comparison, there were 9,197 apartment units delivered in 2015. Properties delivered to the market in the last 12 months achieved an average asking rent of $1,816 per unit. Effective rent has averaged $1,753.

So there is a snapshot of the recent past, which seems to indicate continued construction in the face of only mildly softening (by growing more slowly) building performance. But what do the long-term trends look like?

Historical Perspective

By long term I’m not talking about the 1980s, but rather everything built since the Great Depression. How did Denver grow and what were the trends into and out of and back into the urban core, Englewood or Lower Downtown?

All markets go through construction cycles, and we only think this one is particularly noteworthy because we are in it. The chart seems to bear this out; however, there is a very noticeable uptick when you look at what has happened since 2011.

The vertical axis in this case is the total current appraised value of the properties originally built in each year and comes from the Denver Assessor’s Office, which lacks much detail for recent years, but the report from Axiometrics suggests this upward trend continued through the peak of deliveries, which was just last year (in units).

In the 1930s, 1940s and 1950s, multifamily construction activity in Denver was fairly widespread. Of course, this is a 30-year period, but there were several pockets of concentration as opposed to one dominant area – the latter of which is common in many metro areas in this time frame.

The ’60s follow a similar pattern with a little less dispersion and more concentration downtown and south, but the ’70s, ’80s and ’90s show fairly dispersed activity with no one highly favored area of concentration.

This changes in the early 2000s, when a building boom begins to take a foothold in the LoDo area, with other areas of concentration south of downtown. This 2000 to 2009 period represents 91 apartment buildings over $3 million in current appraised value, including mixed-use. In the 1990s, that number was only 24. This trend has become even more pronounced in the years since 2010. You can view a video of the entire progression by decade on our website, where there also is a video showing this same information annually for 2000 – 2015.

Returning to long-term trends – there’s no question we are building a historically unseen level of apartments and at volumes multiples beyond previous periods. Rents seem to be softening some, but will continue to be driven by supportive demographics and job growth. That being said, job growth is cyclical and highly correlated to rent growth. In addition, the Ballpark area has seen a disproportionate number of units, which may be too highly concentrated to sustain deliveries at, or even near, recent levels.       The day will come when developers and banks can’t make the deals pencil based on reasonable rent growth projections. It’s the natural progression of supply and demand. The amount of the declines in rents and occupancy in the coming quarters is directly related to how soon these trends are spotted and, as a result, how far supply outstrips the supply pipeline.

In other words – it can be a hard landing or a soft one, but delivering 9,000-plus units annually will not be supported by demand in the near future. But, of course, it will be again at some point in the future.

Featured in the May 2016 issue of Multifamily Properties Quarterly. 

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