Continued Growth in Multi-Family
Perhaps the biggest question multi-family investors are asking themselves as they consider investment in the Denver-Metro market is, can the multi-family market continue to improve? After studying the fundamental supply and demand characteristics of today’s market, we think the answer is yes.
How can this be after we have seen unprecedented rent growth, as well as incredible levels of construction of new multi-family properties over the last half-decade? We arrive at the conclusion that the market will continue to improve because there simply isn’t enough housing to meet Denver-Metro’s pent-up, as well as its continually growing, demand. If you simply can’t grasp how rents could still improve given all the cranes we see downtown, we invite you to study the chart below.
In our opinion, this chart is a great visual representation of the mysterious “pent-up demand” we have been hearing about over the last few years.
From 1995 to 2006
During this time, Denver-Metro population grew from 2.1 million residents to about 2.65 million—a gain of 550,000 residents in 12 years. This amounts to a population increase of roughly 46,000 residents per year.
During that same time period, single family developers and contractors delivered a total of approximately 175,000 new homes to the market, and multi-family developers and contractors delivered a total of approximately 55,000 new apartment units to the market. Total housing deliveries combined (excluding condominium and townhome deliveries as we were not able to find reliable data on those markets) equaled approximately 230,000 units, or 2/5ths of a unit for every new person added to the market. The average number of units delivered each year during that time period was about 19,000.
From 2007 to 2014
During this time, population grew from 2.65 million to roughly 3 million—a gain of 350,000 residents in 8 years. That growth breaks down to a population increase of roughly 44,000 per year—just 2,000 fewer residents per year than Denver-Metro had from 1995-2006.
Throughout that same period, single family contractors only delivered 41,000 new homes while multi-family contractors delivered just 33,500 new apartment units. At a total of 74,500 units (again excluding condos and townhomes), only 1/5 of a unit was delivered for every new member of the population added to our area, compared to 2/5ths of a unit delivered per new resident from 1995-2006. The average number of units delivered each year declined to just over 9,300 compared to 19,000 in the previous period reviewed.
This represents an annual shortage of 9,700 units per year; multiply that out by 8 years and we could be looking at a current shortage of 77,600 units and growing. Add to the fact that construction defect litigation environment has largely constrained for sale condominium and townhome development from 2007 to 2014, the housing shortage is likely much greater than demonstrated.
When you consider that the fundamental driver of rental rates and home prices is supply and demand, it is no wonder rental rates and home prices have reached historic highs and are continuing to climb. As population increases, so does demand, but supply has failed to keep up with the growing demand for the last 8 years. Even as construction deliveries are reaching historic norms (2014 was close with over 17,000 combined units delivered) it will take several years above the historic norm of 19,000 units, and a significant uptick in condominium/townhome construction market, to make a dent in the current shortage of likely some 80,000 units.
So, what will stop the growth? When do we see the downside of this cycle? We see several factors that could slow down the market.
First, builders will have to deliver more units to flood the market with supply. If they are able to deliver enough units to match continuing demand and make up for the shortfall of 80,000 units, then prices should flatten. But the big question is, can they do so? And if they can, when will they be able to do so? The biggest year of single family deliveries over the period we studied was 2004 when 18,000 units were delivered, but that is 10,000 units more than we saw delivered in 2014. We therefore have a long way to go to make up for the shortfall, and increasing construction costs are making building moderately priced housing more and more difficult to meet this demand.
Second, a lack of sufficient high-paying jobs to provide salaries that can afford the newly constructed apartments and single family homes would slow the market. But with Denver’s diversified economy and continued desirability of our area, that seems unlikely. Even the current oil bust won’t significantly impact jobs as oil jobs are only a relatively small part of our overall economy. In fact, according to recent data, job growth is exceeding population growth, which will only drive salaries higher.
Third, even if there are sufficient jobs to support new construction, where will the lower and lower-middle class live? Currently, they are rolling out to the suburbs to occupy 1970’s product, but with annual rent growth of 13% for 1970’s product, vacancy in the low 4’s, and investors rehabbing older product for value-added upside, lower and middle class workers will struggle to pay rent even in these areas.
There are certainly a host of unknown factors not mentioned above that could undermine the population and economic growth that Denver is experiencing – think dotcom bust or derivatives in mortgage backed securities. However, after every recession Denver’s economy has come back bigger, stronger and more diverse.
Additionally, people not only move to Denver for jobs, it is one of the most popular places to live in our country due to the quality of life, great outdoors, recreation, entertainment and dining. Our long-term view is that Denver will continue to attract new residents and employers for these reasons. While we certainly miss the old Denver without traffic and parking problems, we really enjoy all that the new Denver has to offer!