Vacancy plummets as unemployment remains compressed. Increasing development remains overshadowed by strengthening demand as the metro is on track to log a 130-basis-point drop in two years amid the completion of 19,000 units. High-wage jobs in the urban core and Tech Center continue to benefit Class A apartments, pushing vacancy into the mid-4 percent range. Workforce housing is also witnessing strong demand, buoyed by Denver’s 2.7 percent unemployment rate. With a diverse pool of incoming jobs from firms like Robinhood and ViewRay Inc., apartment demand will continue to grow, pushing development to new highs. There are more than 16,000 apartments underway in the market, with delivery dates extending into 2021. Owners of existing properties are also taking note of the robust demand trends, realigning rents to meet market conditions, particularly in the Class C segment, where vacancy sits under 4 percent.

Builders stay active to close out 2019. Development will finish out the year strong as more than 2,700 units on track for a fourth-quarter delivery. The urban core will receive 40 percent of that total, highlighted by 350- plus unit complexes in Five Points as well as just west of Empower Field, where various revitalization efforts are occurring. Remaining completions will be scattered across the metro, with some notable developments in Arvada, Littleton and Southeast Aurora. Substantially tight vacancy will continue to lure builders to the Mile High City, sustaining increased construction in 2019 and beyond.

Investment Trends

• West Coast buyers remain integral to Denver’s investment market, homing in on a variety of properties as they seek yields up to 150 basis points higher than those found in their local markets. While downtown attracts some institutional groups, private investors look just outside the city center in neighborhoods such as Capitol Hill and Washington Park. In these areas, cap rates generally sit in the low-5 percent range for smaller Class B assets.

• Value-add properties in the West Colfax corridor remain highly targeted as recent light rail extensions to the area have boosted investment appeal. First-year returns reaching the upper-7 percent band pique the interest of many local investors searching for properties with high growth potential.

• With the metro quickly expanding east, North Aurora is gaining investor interest as buyers focus on the area’s strong outlook. Over the past year, units generally sold for prices well below the metro average, indicating room for significantly more growth in the near future.

Sales Trends: Appreciation Softens Yet Remains Strong; Investors Focusing on Market’s High-Growth Potential

• The Denver investment market remained relatively stable during the past year, with deal flow maintaining a steady pace and the average cap rate remaining at 5.6 percent.

• Units sold for an average of $193,400 since last September, a 6.6 percent year-over-year bump. While appreciation was strong, it stands well below increases witnessed in previous years during the current business cycle.

Outlook: Value-add options throughout the Colfax corridor will continue to attract many private investors, translating to relatively affordable entry costs in an increasingly tech-heavy market.

Capital Markets

By David G. Shillington, President, Marcus & Millichap Capital Corporation

Fed cuts rate again, while balancing assortment of factors. The Federal Reserve cut the overnight rate by 25 basis points at the end of October, the third reduction in less than 100 days in an attempt to lengthen the economic runway. Muted inflationary pressure and continued trade negotiations have boosted the probability for an additional rate cut in December as it is anticipated by some domestic and foreign markets. However, at the end of October, the U.S. and China were in talks for finalizing the first phase of a trade deal, potentially erasing the need for another rate reduction if the preliminary agreement quickly comes to fruition. This, along with positive economic indicators like strong wage growth, sustained job creation and a rising 10-year Treasury, will continue to make future decisions difficult for Fed members as they balance the array of forces tugging at both ends of possible outcomes. Global developments including slowing European economies as well as the progression of Brexit and its potential aftermath will also help determine future Fed decisions. Though recession risks remain, the economy’s solid foundation has softened it in recent months, signaling continued domestic growth in the near future.

Abundant liquidity balances conservative underwriting. Debt financing for apartment assets remains strong, supported by a variety of lenders. Fannie Mae and Freddie Mac, two mainstay apartment capital sources, were recently given increased lending caps, allowing the two Government Sponsored Enterprises to purchase $100 billion in loans during a yearlong period that started at the beginning of the fourth quarter 2019. A wide range of local, regional and national banks; pension funds; insurance companies and CMBS sources will also remain active. All have responded to the falling interest rate climate by reducing mortgage rates, but lender spreads have widened as the 10-year Treasury rate remains near cycle lows. Given the downward pressure on interest rates, lender caution has risen, particularly for construction loans. Though lending is still available for these types of projects, investors may need to blend mezzanine debt with other capital sources until they prove out their concepts and substantially fill units. For stabilized existing assets in most major markets, financing remains plentiful.

National Multi Housing Group

John Sebree
First Vice President, National Director | National Multi Housing Group
Tel: (312) 327-5417 | john.sebree@marcusmillichap.com

Prepared and edited by:
Brandon Niesen
Research Analyst | Research Services

For information on national apartment trends, contact:
John Chang
Senior Vice President, National Director | Research Services
Tel: (602) 707-9700 | john.chang@marcusmillichap.com

Denver Office:

Skyler Cooper
Regional Manager
1225 17th Street, Suite 1800, Denver, CO 80202
Tel: (303)-328-2000 | skyler.cooper@marcusmillichap.com