Denver's multifamily housing market missed out on the boom times seen recently in much of the West. But no other city seems to reinvent itself every few years quite the way that Denver does, and big municipal investments focusing on infrastructure and economic development groundwork appear to have the area poised for another period of sustained expansion. Multifamily housing is positioned to play a big role in that future, reflecting revitalization of the city's urban core and emerging opportunities in transit-oriented development.
Many economists were ready to write off Denver during the past few decades, first when the oil bust of the 1980s pushed the local economy into recession and then again more recently when tech turmoil led to retrenching in the telecommunications sector since 2001. However, job growth now has been simmering at a moderate pace since early 2004, and the metro's total employment count has returned to its previous peak of 1.4 million jobs.
As Denver regains its economic footing, downtown is taking center stage in the recovery process, helped by more than $2 billion invested in the central business district's entertainment, cultural, and transportation facilities during the past 15 years. Downtown is home to all three of the metro's major sports facilities—the Pepsi Center for the city's professional basketball and hockey teams, Invesco Field at Mile High for the football team, and Coors Field for the baseball team. Also, a major expansion of the Denver Art Museum was completed in late 2006, and recent upgrades to the Colorado Convention Center substantially expanded meeting space capacity and also added the 1,100-room Hyatt Hotel.
Denver's urban core features about 7,000 housing units, according to the Downtown Denver Partnership. And it was the neighborhoods in and immediately adjacent to the central business district that added much of the metro's new multifamily housing during the past several years. The biggest urban completion during 2006 was the 333-unit 1600 Glenarm Place, found along the 16th Street Mall shopping district in the heart of the urban core. Local developer Red Peak Properties transformed a 40-year-old, 31-story office tower into one of the area's most upscale residential rental options. The project also incorporates ground floor retail space occupied by a specialty grocery store, a coffee house and a high-end restaurant.
Notable among the apartment properties now under constr uction in Denver's urban core, 816 Acoma Street is a 16-story tower in the Golden Triangle area that includes Civic Center Park and the Denver Art Museum. The 224-unit development by Houston's Hanover Co. should be completed in early 2008. This is Hanover's second community in the neighborhood: The firm finished The Boulevard, totaling 290 units, in mid-2006.
Other residential hot spots in the urban core are the LoDo (Lower Downtown) historic district and the adjacent Ballpark area around Coors Field. Most of the projects coming online in these neighborhoods are smaller developments, and the stock includes a mix of renovated warehouse buildings and new construction.
Student housing is a product niche beginning to be explored in Denver's urban core. Only a couple of student-oriented properties have been introduced to date, but there's a large potential audience. About 35,000 students attend classes at the Auraria Higher Education Center campus, which houses three separate institutions—the Community College of Denver, the University of Colorado at Denver, and the Metropolitan State College of Denver.
While urban core communities grabbed many of the headlines in Denver recently, transportation-oriented development has the potential to emerge as the next big thing. After Denver got its first taste of light rail service in 1994, the 19-mile line connecting downtown and the Tech Center area's huge cluster of suburban office space went into operation in 2006. Voters now have approved FasTracks, a $4.7 billion project that will add 119 miles of track and move Denver to a top five position nationally for light rail service. As the name FasTracks implies, build-out will occur quickly, with the project targeted to complete in 2016. Plans call for more than 50 transit stations, with all but a handful offering transit-oriented development opportunity.
Among the locales that should benefit from expansion of Denver's light rail system are the Stapleton and Fitzsimons areas. Located east of downtown on the 7.5-square-mile former site of Denver Stapleton International Airport, Stapleton is one of the country's most notable live/work/play communities. Opened in 2002, Stapleton already is home to about 7,000 people. The project ultimately will feature roughly 12,000 residential units, some 3 million square feet of retail space, and about 10 million square feet of office space. Fitzsimons, found just east of Stapleton, is the redevelopment of the former Fitzsimons Army Medical Center into a 579-acre campus of hospitals and bioresearch labs. Employment at Fitzsimons is closing in on 13,000 people, and the count should climb to about 30,000 people over the next decade or so.
While urban core housing and transit-oriented development in Denver offer some clear opportunities, many traditional suburban properties are continuing to struggle. Indeed, recovery for the overall market remains a work in progress, after a huge wave of new supply came on stream just as the economy went into recession earlier in the decade. Occupancy has improved nearly five points from its mid-2003 bottom, but the rate of 94.2 percent seen at the end of 2006 still falls below the national norm and, furthermore, ranks as the weakest performance recorded across the West region of the country.
And occupancy is actually the good part of the performance story, since the rent production stats are even more troublesome. In dramatic contrast to average rent growth that topped 5 percent for major metros in the West during calendar 2006, effective rents in Denver inched up a mere 0.8 percent. Today's average monthly rent of $779 is still more than 7 percent below the peak level seen six years ago in the middle of 2001. The fact that rents haven't gone up as occupancy has improved in Denver is a little surprising, since the area does have a big premium to buy versus rent housing. The median single-family home price registered around $250,000 in late 2006, according to the National Association of Realtors.
Hurting the metro's rent positioning, Denver has reigned as the country's rent giveaway king throughout recent years. While the share of properties featuring concessions has come down from its most extreme level, discounts still were offered for 55 percent of the stock surveyed by M/PF YieldStar in late 2006. Furthermore, the specials aren't minor enticements in Denver: The average concession as of the fourth quarter of 2006 was a 15 percent discount, or nearly two months of free rent.
Among the key neighborhood-level apartment performance trends seen recently in Denver, the urban core registered fairly healthy occupancy of 95.7 percent at the end of 2006, despite adding the biggest portion of the metro's new supply in 2005 and 2006. And the area in and around downtown was the region's runaway rent growth leader, as effective rents jumped nearly 8 percent. Nearly all of this rent inflation registered in older properties, whereas rates were flat in the top-tier stock that had to contend with competition from recent deliveries in initial lease-up. Boulder County also did comparatively well in calendar 2006, posting December occupancy right at the 96 percent mark and annual rent growth a little above 2 percent.
Looking ahead for metro Denver, the key number to watch is that rent growth figure. With rents so clearly under-positioned and occupancy now moving into a zone that's at least reasonably healthy, the metro is overdue for a rent correction. It wouldn't be surprising to see rental rates spike in 2007 and 2008, as long as occupancy continues to improve modestly. Once rents reach firmer ground, building will probably surge. Since Denver has looked ready to make a big move for at least a couple of years, developers are lying in wait, all set to go once achievable rents reach levels high enough to justify construction of more than just a few niche properties. While a big part of today's story in Denver is how little new construction is occurring, the key plot a year or two from now could focus on the return of an aggressive building pace.
Greg Willett is vice president of research and analysis at MPF YieldStar.
MFE DOZEN: Asheville, N.C. (January) Southern charm wins big
Chicago (February) Good news for the Windy City
Atlanta (March) Peachy deals crop up
Denver (April) Multifamily goes mile-high
Washington, D.C. (May) Capital efforts pay off
San Jose (June) Golden opportunities abound
Minneapolis (July) New constructions in the Twin Cities
New Orleans (August) The Big Easy rebuilds
Providence (September) Promising developments in the Northeast
Dallas (October) Herding up new projects
Indianapolis (November) The heartland keeps ticking
Manhattan (December) The market that never sleeps
FAST FACTS Considering Denver?
Here's what you need to know:
- Population: 2.7 million
- Occupancy: 94.2% (December 2006)
- Median Age: 33.6 years
- Median Household Income: $45,658
- Average Rent: $779 (December 2006)
Unemployment: 4% (December 2006) NOTABLE: Denver will host the 2008 Democratic National Convention. The Mile-High City actually is a mile high—measured from the 15th step on the west side of the State Capitol Building, Denver has an elevation of 5,280 feet above sea level. Denver is also where the first flakes of gold were discovered in Colorado's Gold Rush of 1858-59. Miners soon erected the city's first permanent structure: a saloon.
Leveling Out
Multifamily completions maintain an even keel at the end of '06.
The strong recovery that characterized the apartment market over the past few years is expected to give way to more stable growth in 2007, according to Marcus & Millichap's quarterly “Performance Monitor,” which analyzes multifamily completions, revenue, permits, and starts and indexes them back to the year 2000.
At the end of the fourth quarter 2006, revenue growth remained robust, although owners will feel some competition as reconversions draw from renter demand. As such, revenue growth will be driven by effective rent growth rather than occupancy improvements.
The number of units completed increased in the fourth quarter compared to the previous quarter, adding more than 20,000 units to inventory. Completions, as a percent of inventory, are running at 0.3 percent, which is 54 percent of 2000 levels.
Compared to the same period one year ago, vacancy remains nearly flat. As conversion activity reached the lowest levels in 15 quarters, supply surpassed demand, causing a slight fourth quarter bump in vacancy. Condo conversion activity continues to wane, with an estimated 3,700 units sold for conversion during the fourth quarter of 2006, down almost 90 percent from the same per iod in 2005. - Marcus & Millichap
Money Matters
Analysts pull back on some multifamily stocks.
Analysts up and down Wall Street adjusted their recommendations in the first quarter as they reflected on 2006 performance and prognosticated on how current economic trends will affect the apartment industry. Job and apartment fundamentals are moderating in several rental markets, and home-buying is still affordable enough for some renters fed up with huge rent hikes.
These factors led some analysts to downgrade a few multifamily stocks. Chief among them: Archstone-Smith (NYSE: ASN). Four firms—Goldman Sachs, JP Morgan, KeyBanc Capital Markets, and UBS—dialed back their recommendations for the company to hold or neutral. (Hanley Wood, LLC, which publishes MFE, is owned by affiliates of JPMorgan Partners.)
“More often than not, Archstone is on the forefront of the rent spectrum,” says Alexander Goldfarb, a multifamily analyst with UBS, which downgraded ASN stock in February. “We think they'll have a harder time getting the same type of increases they have been going forward.” That's because residents are becoming more sensitive to rent increases and may walk—to a lesser-priced apartment or into a for-sale home—they feel landlords have hiked too high, he says. “We think the rent growth they have gotten over the past couple years, they won't be able to get in the next year from marginal rentals,” Goldfarb notes.
For his part, Archstone chairman and CEO Scot Sellers isn't too concerned with analysts' quarterly views. “We don't focus our attention on short- term changes in ratings,” he says. “We do what we believe are the right things to create significant long-term value for our shareholders, and our track record in this regard is very strong.”