August 24, 2017

Denver’s apartment-building frenzy nears end – slowdown predicted in 2018

The Denver area’s apartment building frenzy will slow next year as demand for new high-end developments wanes and financing for new projects gets tighter, say economists and industry leaders.

As renters’ pocketbooks respond to rising prices and banks look to other investment projects, multifamily-unit construction will slow in the Denver-Boulder area, according to a midyear economic update in the University of Colorado’s Colorado Business Review.

Fewer units are planned for construction than are currently in production, the report states, predicting that a slowdown could begin early next summer.

The group of industry experts and economists who authored the report attributed the slowdown to decreasing property values as complexes move toward the outskirts of the city. Denver no longer has the demand for more luxury apartments. The report also notes a cultural shift: Millennials are starting to move out of rentals in or near downtown to purchase property farther from the city center.

Nearly 25 percent of units under construction in June were downtown – concentrated in neighborhoods such as Union Station, Golden Triangle and Highland — according to a report that month by RealPage, a national real estate data analytics firm. Those in the industry agree that Denver’s high-end apartment market is oversaturated.

“The reality is that (the industry is) building high-end apartments, and that is not where the majority of people moving to Denver can afford to move,” said Tim Walsh, CEO and founder of Confluence Companies, a real estate development company focused on building affordable apartments in suburban Denver. “We’re building for the top of the income pyramid, we’re not building workforce housing.”

Residential construction activity this year is down 8 percent from last year, according to Dodge Data & Analytics, an analytics provider for the construction industry.

Walsh and others said that in the past year builders have shifted toward the suburbs of Denver for a variety of reasons – topping out of demand in the city, cheaper land, less financing and the rising cost of construction.

“I think, in general, we’re plateauing,” Walsh said of the apartment market in Denver. “I think we’re close to that ceiling. … We pushed them as high as people are willing to pay.”

Walsh said he expects some projects being planned in Denver right now to eventually fall through – he doesn’t think the financing or the demand will be there. CU’s study also reported that lending for multifamily homes is tightening. Lenders have begun to shift their focus on suburban projects, which were previously overlooked in favor of the city, Walsh said.

While the demand for residential units is strong, the constraints on firms might be too great to keep up with the building boom that has taken over Denver in recent years. Now, the dollar value of construction activity won’t increase in the next few years, according to CU’s report.

“Most builders have very little inventory, if any,” said Jeff Whiton, CEO and executive vice president for the Home Builders Association of Metro Denver. “Interest rates are relatively low, incomes are at an all-time high and population growth is at an all-time high.”

The construction industry still faces a labor shortage — employment was down 10.5 percent from July 2007, according to the CU report – causing lags in residential build times and tight budgets.

“The cost of construction has gotten so high, mainly because of a shortage of labor,” Walsh said. “What you can still build relatively affordably are the three-story, garden-style apartment buildings. I think you’ll see more of those in the suburbs.”

Meanwhile, Whiton said for-sale dwelling construction – such as townhomes, duplexes, single-family homes and condos – is seeing impressive growth. CU’s study reports that the overall industry remains healthy and continues to grow.

Denver’s homebuilders association saw an 18.7 percent increase in permits issued from June 2016 to last June, Whiton said. But, he would actually expect it to be higher if the labor shortage and municipality permitting wasn’t slowing it down.

Walsh said he does not see an overall slowdown coming but a shift as builders focus outside the city.

“No one here is projecting that the rate of people migrating to Colorado is going to slow down,” Walsh said. “They’re going to need to live somewhere.”

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