Western Real Estate Business

MAY 2017

Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.

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M A R K E T H I G H L I G H T: C O L O R A D O 42 • May 2017 • Western Real Estate Business www.REBusinessOnline.com Denver is and has been a hotbed for new residential construction. This is mostly due to high household growth, which has created a strong demand for housing. The huge development pipeline of almost 30,000 units and the addition of 28,000 units over the past three years is starting to effect rent appreci- ation, however. There are 103 projects currently under construction contain- ing about 24,000 units. Rent growth began falling last fall, and continued over the past three months when rent growth dropped by 30 basis points. So far, the Denver market has man- aged to absorb the new supply, but owners, eager to fill their projects, are offering more concessions — includ- ing a month or two of free rent — to win over tenants, a key reason why rent increases have slowed. Investors still bought apartments in Denver, bringing the total sales volume to a cyclical high of $6.7 billion in 2016. A healthy job market is creating demand and home permits are in the $400,000 average, which prices most renters out of this market. Construc- tion is No. 1 in job gains, with projects such as the $1.2 billion widening and covering of the I-70 in Northeast Den- ver contributing to job growth. Infra- structure projects and the boost that trade received from the legalization of cannabis have transformed the sector into an anchor of the metro's economy. All this new construction, not to mention property sales topping $400 million in the year's first two months alone, would lead one to believe these trends will continue in the foresee- able future. However, the rapid rent growth of the past will slow consid- erably to the 3 percent or lower range for 2017. The large appreciation in prices will not continue as the Den- ver market has passed that phase of the apartment cycle. Increase in val- ues will come from increased net op- erating income versus buying at the right "time" in the cycle. We have been advising our clients to sell Den- ver product and put the dollars in the Colorado Springs market, which cur- rently has much better demographics than Denver. Over-building is not out of the question for the Denver market. Rent growth in metro Denver fell to a four-year low in fourth quarter of 2016. It has been falling for the past six quarters after reaching a record high of 13.2 percent during the second quarter of 2015. Denver rents were up 2.6 percent year-over-year in February, 20 basis points below the national rate. The av- erage rent was $1,381 per unit, which was $75 above the national average, according to Yardi Matrix. Growth was led by the working-class category, which rose 3.1 percent year-over-year to an average of $1,187. As of January, the occupancy rate for renter-by-ne- cessity assets was 94.8 percent, rough- ly 70 basis points ahead of those in the lifestyle category. Berkley/North Washington (6.5 percent), Golden (6.5 percent), Wheat Ridge (6.3 percent) and Arapahoe- East (6.3 percent) led rent growth, showcasing the appeal of more afford- able submarkets. Although the CBD/ Five Points/North Capitol Hill led all submarkets for development and investment activity in 2016, rents in this area were down 0.1 percent year- over-year. Another 8,000 units are un- derway in the submarket, meaning further moderation is expected. The CBD's average rent of $1,776 per unit as of February trailed only City Park, which commanded the highest rents. Housing permits in metro Denver were up 18 percent in 2016. The per- mit total is now at a 14-year high. There were more than 10,000 units completed in 2016, an increase in sup- ply of 4.6 percent, one of the highest in the U.S. and 210 basis points above the national average. Occupancy in stabilized properties dropped to 94.4 percent in January, down 140 basis points compared to March 2016. Roughly 57,000 units comprise Denver's multifamily development pipeline. Of those, nearly 24,000 units were underway as of February, while another 15,000 units had entitlements in place. A third of all units under construc- tion are in the CBD/Five Points/ North Capitol Hill submarket. The area also fared best for investment, leading all submarkets for transac- tion totals. The submarket is home to the largest project being built in the metro: Pivot Denver, a 580-unit up- scale community developed by Hol- land Partners at the northeast corner of 17th and Wewatta streets. Sales surged in Denver in 2016 when nearly 150 transactions were complet- ed for roughly $6.7 billion. The new cy- clical high is a 58 percent increase over 2015. Buying pressure sent the aver- age per-unit price to $208,275 in 2016. This has also lowered the yields, with Class A complexes selling under the 5 percent mark in 2016. Class B proper- ties commanded a return just above the 5 percent range. Sales in Denver's core lead buyers interest over the past 12 months, with about $700 million selling in the CBD/Five Points/North Capitol Hill submarket alone. The largest transaction complet- ed during the past 12 months was American Realty Advisors' purchase of Alara Union Station at 1975 19th Street. The company paid Greystar $154 million for the newly built, 314- unit community. EXPLOSIVE NEW CONSTRUCTION CHANGES DENVER'S MULTIFAMILY MARKET Ron Spraggins Founder and CEO, Commonwealth USA Top Submarkets for Transaction Volume Submarket Volume ($MM) CBD/Five Points/ 692 North Capitol Hill Northglenn/Thornton 374 Hampden/Virginia Village/ 291 Washington Virginia Vale Arapahoe-Southwest 290 Lakewood-North 256 Douglas County-North 235 Broomfield/Todd Creek 233 Rental Rates - 2017 Unit Type Low High Avg One Bedroom $484 $3,592 $1,207 Two Bedroom/Two Bath $775 $7,276 $1,565 Source: Yardi

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