July, 2015 | DenverMultifamilyAdvisors.com

Source: Top 4 Reasons Why Rent Growth is Booming in Denver – MPF Research

Three to five years ago, few would have picked the Denver apartment market to perform as well as it has. But with nation-leading rent growth, strong economic and demographic tailwinds and a structural shift in the single-family market, the Mile High City apartment market is firing on all cylinders. Starting in late 2010, the Denver/Boulder market has been elite in terms of apartment rent growth. And since then, annual rent change has continued strong upward momentum. In fact, Denver led the country in 1st quarter 2015 with a 10.5% year-over-year rent hike, a 20-year high for the metro.

Strong rent growth has come despite decade-high new supply levels. In fact, Class A product, which is vulnerable to competition from new supply, posted same-store rent growth of 9.3% in year-ending 1st quarter 2015. When looking at effective rental rates over the last five years, all property classes posted strong gains, but mid-rise assets led the pack. Average effective rental rates among surveyed mid-rise properties increased 55% since 2010.

Over the past five years, rent change in the Denver area has accelerated at almost twice the pace of the MPF Research top 50 U.S. markets. During that time, average apartment rental rates in Denver/Boulder rose nearly 40%, a top five performance nationally.

1. Denver is a Millennial magnet

Metro Denver continues to rank among the nation’s fastest growing metros, with annual population growth averaging 1.7% over the last 10 years. Driving population growth is the 20- to 34-year-old cohort, critical to the apartment market. As such, Denver has become a Millennial boomtown. In fact, over the last three years, Denver has seen one of the nation’s largest influx of Gen Y’ers. That age segment has grown nearly 11% since 2011, twice the national rate and second fastest among metros, behind Texas’ capitol city Austin.

2. Denver continues to lure college-educated labor force

Additionally, Denver has one of the most educated workforces in the country. In fact, the Mile High City ranks #7 nationally for percentage of adults age 25 and over with a bachelor’s degree. In 2013, the 10 largest colleges and universities in the Denver metro enrolled a total of about 175,000 students. From 2007-2012, the U.S. Census ranked the Denver metro #2 for attracting college age workers. Strong Millennial growth coupled with a deep well of educated workers continues to drive apartment demand in the Denver area.

3. High-paying jobs are driving income growth

Denver has added a large proportion of high-paying jobs, leading to one of the nation’s largest leaps in household incomes. Over the last three years, the Denver area has ranked #3 in terms of median household income growth. One reason is that Denver not only headquarters nine Fortune 500 Companies, but has also become an entrepreneurial hub. According to the Downtown Denver Partnership, there are 370 tech startups in the central business district, accounting for roughly 3,000 jobs and 8% of downtown businesses. In fact, tech innovation was so concentrated here that the U.S. Patent and Trademark Office opened a permanent satellite location in Denver in June 2014, one of only four in the country. Additionally, crude market volatility has caused oil and gas companies to reel in expenses, but energy remains a prominent job segment. Denver is the most populous city within a 500 mile radius, and sits atop the deepest part of the Denver-Julesburg (D-J) basin, making the metro a powerful energy sector hub. The D-J basin is centered on the eastern slope of the Rockies, extending south of Denver and into parts of Wyoming, Nebraska and Kansas. Oil exploration companies looking to hire are more likely to draw from the vast employment pool in Denver than from a smaller city in the D-J basin. Altogether, the energy sector employs about 50,200 people, according to Metro Denver Economic Development Center, placing Denver at the #4 spot nationally for oil and gas employment. Denver is also a hotspot for other industry clusters, including aerospace, aviation, bioscience, broadcasting, financial services and information technology. Additionally, Denver’s central location makes it a business and tourism hub for commerce across the U.S. In 2014, the Denver International Airport supported 53.4 million passengers, the most traffic in the airport’s history. Such a high travel volume brought in about $26 billion in revenue to the Denver region and supports about 35,000 jobs.

4. Denver’s single-family market is thriving

If you work in the real estate industry, it should come as no surprise that the single family segment in Denver is a red-hot seller’s market. After two years of double-digit increases in sales volumes, single-family sales have slowed. And as of May 2015, average single family prices climbed to an all-time high above $420,000, according to the Denver Metro Association of Realtors (DMAR). But the slowdown in sales volumes is limited to homes priced below $300,000, due to extremely low inventory. Furthermore, sellers have been capturing more than 100% of the listing price, putting buyers in a bidding war, according to DMAR. Housing stock is hitting long-term shortages with about 1.3 months of supply most recently, compared to 5.3 months nationally. Low housing inventory has plagued the Denver area for some time as developers gravitate toward pricier middle-market or luxury homes. In fact, current single-family permit volume is just 60% of the long-term average. Additionally, lack of labor has pushed up costs for builders, as many skilled construction workers and subcontractors have found a new place Colorado’s booming oil industry. Builders have also cited a lack of available land. Meanwhile, the little supply that is available is being gobbled up quickly. John Burns Real Estate Consulting found that many developers in Denver hit 70% to 90% of their annual sales goals by April 2015, while nationally builders are at 43%. Finally, Denver home prices did not overheat prior to the recession like many of the other markets as evidenced by the Case-Shiller index. In fact, if we indexed the MPF Research top 50 markets to 2007 price levels, Denver’s home appreciation has outperformed every market other than Houston and Austin. Housing demand is fierce in Denver, and accelerating single-family values are pricing would-be home buyers out of purchasing and into the rental segment.

Conclusion

Denver continues to have elite rent growth with near-universal strength across market segments, and has sustained that momentum for nearly five years. Denver continues to attract young talent, growing the primary renter demographic population. Solid employment growth continues to boost incomes, particularly in the energy and tech services sectors. The strong economic and demographic tailwinds have driven demand for housing in the Mile High City metro. For the apartment market, demand continues to come in above long-term averages, blunting the usual adverse effects of decade-high new supply levels. Finally, while the swell of single-family prices is a good indicator for the Denver economy, it’s also a good sign for apartment operators as extremely low supply and soaring prices will likely stem the loss of renters to home purchase.

The Metro Denver Economic Development Corporation (Metro Denver EDC) and the Denver Metro Chamber of Commerce presented the 2015 Metro Denver Economic Forecast yesterday at Vectra Bank’s 22nd…

Source: 2015 Economic Forecast | Metro Denver

Click The Following Link To View Report: 2015 Economic Forecast for Metro Denver – Apartment Market Key Indicators

The 2015 Economic Forecast is researched by Patty Silverstein, chief economist for the Metro Denver EDC, and reviews the events of the past several years as well as highlighting emerging trends for this year. The forecast includes national-level information and includes estimates for statewide indicators as well.

“Metro Denver will continue to benefit from solid economic performance in 2015. Even as we experience increasing employment and confident consumers, we need to recognize that our aging and retiring baby boomers and well-educated and ready-for-the-workforce millennials are changing the face of our community and influencing housing patterns and how we do business,” said Silverstein.

Compared with the national average, Metro Denver’s employment growth in 2014 was more than 1.3 percentage points higher at 3.2 percent, which included gains in each supersector except information. Silverstein forecasts job growth in 2015 to be 3 percent, which represents the addition of about 45,000 jobs.

According to Silverstein, four supersectors of the regional economy should post strong employment growth in 2015: natural resources & construction (5 percent), education and healthcare services (4.1 percent), professional and business services (4 percent), and leisure and hospitality (3.6 percent).

“As the area continues to attract new companies, draw in talented workers, and promote entrepreneurship, Metro Denver will have better-than-average job growth and a lower unemployment rate than the United States and Colorado,” said Silverstein.

In fact, robust job growth in 2014 lowered Metro Denver’s unemployment rate in October to 3.6 percent, the lowest rate since October 2007. While unemployment increased slightly since October, the rate remains near historic lows for the region.

“With a forecasted average unemployment rate of 4 percent in 2015, our companies can expect to see a very tight labor market,” said Silverstein.

Silverstein also highlighted the demographic shifts that are changing the face of Metro Denver’s workforce. She noted that millennials (born between 1981 and 1997) now compose the largest population group in Metro Denver.

“While generation X and baby boomers dominate the workforce today, the millennials are making their mark on the workplace and will represent the largest component of the labor force within 10 years,” she explained.

Changing demographics not only have implications for future labor force growth patterns and consumer spending, but also residential real estate purchases.

The Metro Denver EDC’s CEO Tom Clark says that with limited supply in the residential real estate market and above-average population growth, home prices and appreciation are rising and construction activity is picking up.

“While increased residential construction activity is very positive for our economy, we do see challenges related to millennials and baby boomers seeking affordable, owner-occupied housing due to almost flat construction of condos and a historic rise in apartment construction,” said Clark. “We are working with the state legislature on construction defects legislation to address this critical gap.”

The forecast for Metro Denver includes the seven counties of Adams, Arapahoe, Boulder, Broomfield, Denver, Douglas, and Jefferson. Economic indicators analyzed include: population trends, employment by industry, unemployment, retail sales growth, commercial real estate, and residential activity.

2015 Forecast – Key Indicators(e)=estimate (f)=forecast

Metro Denver	2014 (e)	2015 (f)
Population	3.002 million	3.053 million
Net MIgration	30,629	30,879
Employment Growth Rate	3.2%	3%
Non-Agricultural Employment (thousands)	Total: 1,512.6	Total: 1,557.9
Unemployment Rate	5%	4%
Retail Trade Sales Growth Rate	5.7%	5%
New Residential Units	17,902	18,836

Notable indicators from this year’s forecast report include:

National Economy

The United States has started on a new economic growth path. The nation’s employment level in mid-2014 finally surpassed the pre-recession peak, representing a 76-month job recovery. Job gains have been widespread, with preliminary data suggesting that all states posted an average annual increase in employment from 2013 to 2014. Most analysts expect U.S. economic activity to strengthen in 2015 due to rising wages leading to increased consumer spending, improved home sales and new construction activity, and active business hiring. The employment growth rate is expected to increase from 1.9 percent in 2014 to 2 percent in 2015.
Gross domestic product will grow at a 3.1 percent pace in 2015, which is faster than the historic average, spurred by enhanced consumer spending and stronger business investment. As GDP and employment expand, the nation’s unemployment rate will drop to 5.5 percent. Rising income and low levels of inflation bode well for the nation’s housing markets, with expected increases in construction activity and home sales.
A big surprise in the latter part of 2014 was the rapid decline in the price of oil, which dropped from a monthly average price of $106 per barrel in June 2014 to $59 per barrel in December 2014. The resulting drop in gasoline prices means that consumers have more money to spend on other goods, which is a plus for the U.S. economy as a whole. In addition to potentially rising interest rates, the greatest risks to U.S. economic growth are global economic conditions and social and political instability in the Middle East and Russia.

Colorado Economy

Colorado maintained its ranking as a top 10 state for employment growth during 2014 and will post a strong 2.7 percent increase in employment in 2015. The employment base is expected to reach 2.5 million workers in 2015, representing the addition of over 66,000 jobs.
The natural resources and construction, leisure and hospitality, and professional and business services supersectors are expected to lead the state in employment growth through 2015. Despite the strong growth rate at the state level, employment growth has not been consistent across the state’s regions. Employment growth in Metro Denver has been strong and diverse, while Weld County has been the fastest growing region in the state due to the expanding energy sector. On the other hand, the Colorado Springs metropolitan area has experienced a slower growth rate due to its reliance on military spending, and activity remains sluggish on the Western Slope.
As companies continue to increase their staffing levels, Colorado’s unemployment rate will steadily decline to levels below “full-employment,” indicating an increasingly tight labor market. Personal income growth will accelerate in 2015 to 6.7 percent due to increasing wages, rising housing prices, and increased investment. Declining unemployment and rising personal income bode well for consumer spending in 2015. Retail trade sales increased by about 7.2 percent in 2014 as more confident consumers were encouraged to shop. A slightly slower 6 percent growth rate is expected in 2015 due to lower gasoline sales and more frugal spending patterns. Colorado’s expanding employment base, high quality of life, and increasing presence in the global business community continue to attract individuals and businesses to the state.

Metro Denver Economy

Over 60 percent of employment in Colorado is located in the seven-county Metro Denver region. Metro Denver job gains accelerated during 2014, finishing out the year stronger-than-expected with the addition of 46,200 jobs. An additional 45,000 jobs are expected to be added in 2015, representing a 3 percent growth rate. Metro Denver will experience particularly strong employment growth in the education and healthcare services, professional and business services, and leisure and hospitality supersectors.
With limited supply in the residential real estate market and above average population growth, home prices will continue to rise and construction activity will pick up. The median home price in Metro Denver increased 9.4 percent in 2014 to $306,900 compared to the U.S. median of $207,300, and prices are expected to rise another 6 percent in 2015. Residential building permits rose 5.7 percent between 2013 and 2014 as developers became more confident in the economy and demand continued to rise. An additional 18,800 housing units are anticipated in 2015. Multi-family construction represents nearly 50 percent of the new units built, significantly higher than the 35 plus-year average of multi-family units representing roughly one-quarter of construction. The high level of multi-family activity reflects more interest in transit-oriented development as the FasTracks system nears completion, as well as baby boomers’ desire for more maintenance-free housing options and millennials’ slow movement into home ownership roles.
A vibrant entrepreneurial community bolsters the expanding Metro Denver economy. Indeed, Forbes ranked Denver as the second-best city to launch a start-up business and NerdWallet ranked Denver the fifth-best city in the U.S. for millennial-aged entrepreneurs. The solid business fundamentals in Metro Denver ensure that the region will continue to expand in 2015 and beyond.