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