Greysteel's Ryan Floyd and Scott Whitfield Talk Denver State of the Market
Greysteel's Ryan Floyd and Scott Whitfield were featured in the November 2018 issue of the Colorado Real Estate Journal to discuss the State of the Market as Strong Economic and Population Growth Continues in Denver.
Denver has been a premier destination for job seekers in this growth cycle, especially for educated millennials, and current labor conditions reinforce this proposition today. Net migration and total employment growth remain well above the national average.
According to U.S. Bureau of Labor Statistics (BLS) data, total non-farm employment in the Denver metro area was up 2.9% (43,000 jobs) year-over-year in August 2018, while the unemployment rate increased to 3.3%, up from 2.7% one year earlier. The higher unemployment rate could be a result of an increase in the civilian labor force, suggesting that stronger wage growth has drawn existing residents from the sidelines.
What draws people to Denver? The Mile High City is considered one of the best cities in the nation on a range of metrics. Denver earned the No. 3 spot in U.S. News & World Report’s 2018 “Best Places to Live,” which ranks the country's 125 largest metropolitan areas based on affordability, job prospects, and quality of life. Colorado Springs reached No. 2 on the list, as well, boasting a booming job market and high quality of life scores that contributed to its climb from No. 11 last year. Meanwhile, the state of Colorado earned top rankings as the No. 1 economy in the U.S. by 24/7 Wall Street and also garnered WalletHub’s No. 1 ranking in nationwide job growth. It appears Denver, and Colorado, are on the path to continued economic success.
MagnifyMoney recently ranked Denver the No. 2 “Top Millennial Boomtown in the U.S.” The financial education website analyzed data related to where young people moved between 2011 and 2016, using four metrics (millennial population change, workforce participation, unemployment rate, and median wages). Denver ranked behind San Francisco with an overall score of 80.6 but had the largest overall millennial population increase in the nation, rising 18.7%.
- More than 50% of Metro Denver multifamily units are occupied by renters aged 25-44 and millennials (aged 25-34) occupy over 30% of the units.
The Denver Office of Economic Development recently approved several tax-incentive packages involving thousands of high-paying jobs. These incentives will inevitably entice more high-tech companies, seeking relief from the high cost of doing business on the West Coast, to relocate or expand in Denver. Moreover, if Denver is selected for Amazon’s HQ2 (some observers place it among the top 10 finalists), the impacts on the market could be far-reaching, including continued upward pressure on housing costs and increased traffic congestion.
How does this affect the multifamily market? Denver’s apartment market, one of the nation’s most active, continues to boom and demand remains strong. However, the ongoing construction boom could produce some moderate softening in rents and some increases in vacancy, particularly in the core area, where development has been most active. Here is the current state of the multifamily market:
At the end of Q3 2018, net absorption in Metro Denver totaled approximately 8,400 units and is on pace to surpass 10,000 units by the end of the year. Steady job growth and the dynamics of the single-family home market will continue the strong demand needed to lease up the supply in the pipeline. Vacancies closed the third quarter at 7.1%. Despite near-record levels of supply, vacancies are still below the metro's historical average of 7.3% since 2000. The fact that vacancies are this controlled and rents have not deteriorated shows an uptick in demand. Denver’s northern suburban submarkets in particular have demonstrated exceptional strength over the past year. Five out of the eight fastest growing cities in metro Denver are located north of I-70 and the N-Line light rail expansion, set to open in 2019, promises longer-term growth. The highly competitive Downtown Denver submarket, popular with millennials in search of a live-work-play environment, remains the main focus of leasing activity in the metro. Since the beginning of 2017, Downtown Denver has accounted for an impressive 33% of all absorption in the metro area with over 5,600 units absorbed. An additional 6,000 units are currently under construction in the Downtown submarket.
All time high rent levels and pricing alongside notable barriers to homeownership continue to attract developers to Denver. Supply additions in 2014 and 2015, the largest in 40 years, are on track to be exceeded during the 2017 and 2018 two-year period.
At the end of September, nearly 8,400 units were delivered in Metro Denver, and with approximately 16,500 market rate units currently under construction, 2018 is expected to be the largest single-year completion total since at least 1980. The Downtown Denver submarket leads construction activity in the metro, accounting for 36% (5,950 units) of new developments, followed by the Stapleton-East Denver (1,560 units) and Aurora (1,370 units) submarkets. Currently at cyclically high levels of construction, Stapleton-East Denver and Aurora are likely benefitting from the recently opened A-Line and R-Line of the RTD rail system.
Rents have impressively held in the black, despite the fact that Denver is now firmly in the midst of its largest supply wave to date. Average effective rents reached $1.70/SF at the end of Q3 2018, up 3.7% from one year ago and climbing 38% over the past five years. Average asking rents reached $1,500/unit at the end of September, up 3.8% from one year ago and growing 40% since 2013. The current pipeline alone should keep the metro in a highly competitive leasing environment through at least year-end 2019.