Apartment developers see dollar signs in Denver

City's 'cool' factor drives inmigration, job growth

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City's 'cool' factor drives inmigration, job growth

Steve Bergsman
Inman News®

In 2011, Chris Cowan, a senior associate broker with Apartment Realty Advisors in Denver, Colo., completed 10 land sales, and his pipeline is already stuffed with potential deals for about the same amount of transactions this year 2012. All the land will be going to multifamily projects.

Denver is quickly becoming an apartment kind of town.

In 2011, about 1,400 apartment units were completed in Denver and this year those numbers are expected to jump to 2,600 units, said Mark Williams, executive vice president of the Apartment Association of Metro Denver.

"Then we expect 4,000 units in 2013 and 6,000 in 2016. If a couple of things fall into place, those numbers will actually be even better. By 2016, we could be building greater than 6,000 units."

There are number of reasons why Denver developers would choose to build higher in the Mile High City. First off, Denver is an older city that can boast a successful downtown rebirth; core Denver has become an extremely popular place for young people to live.

Secondly, there's the intangible "cool" factor. As Cowan likes to say, even if the current economic strengthening turns out to be a jobless recovery, "People would rather be unemployed and living in Denver than in Houston."

Thirdly, demographics are strong.

"Even in the worst of times, our population has grown over 1 percent annually, which is greater than the national average," said Richard Wobbekind, an economist at the University of Colorado. "In this recent downtown, we had a steady 1.4 percent to 1.5 percent population growth, about half that coming from migration into the state."

To which Cowan added, "There about 130,000 people in the state of Colorado turning 20. In terms of graduating high schoolers, a large percentage stay in the state. Demographic trend lines are pretty strong."

Finally, the strongest reason for a resurgence in apartment development: simply a turn in the cycle. Denver has a history of multifamily booms, which are then followed by definite slowdowns, but not busts.

"Over the past eight years, there were really only about 13,000 units delivered into this market," Williams said. "But, if you look at the eight years prior to that, 50,000 units were delivered. For the last eight years, about 1,500 units a year were built, while in the prior eight years, we were delivering into the market 6,000 units a year.

"What that means is that we had a very dry market in terms of units being built, so there is a lack of supply. Existing units are being absorbed."

Historically, Denver absorbs about 4,500 units a year, so any excess has probably already been absorbed.

A healthy multifamily market will see about a 5 percent vacancy rate overall, simply due to tenant movement and turnover. Lately, Denver has been sporting a vacancy rate in the 4.5 percent to 5 percent range. There's about 295,000 apartment units in Denver (including Boulder), which means there's about 13,000 to 14,000 units empty at any given time.

Low vacancy rates, of course, mean healthier rents. In the third quarter of 2011, average Denver rental rates climbed to $936, up from $912 in the third quarter of 2010, Williams said.

Here's the way Cowan looks at the rental rate situation: Today existing rents are around $1.85 a square foot. Two years ago, rental rates were $1.45 a square foot. By the end of 2012, rental rates could be $2 to $2-plus a square foot.

The economics of multifamily development are, broadly speaking, dependent on strong job growth, so I asked Wobbekind to tell me the financial state of the state.

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