Denver Apartments Face Overbuilding?

There was some talk about the "O" word at Bisnow's 3rd annual Denver Multifamily event at the Sheraton Denver Downtown late last week—overbuilding. Could it happen to the Denver market? Our speakers offered a variety of opinions on the question (spoiler alert: the answer is maybe).

The overall vacancy rates is about 9.5%, but in the more stabilized multifamily sector, it's 4.2%. Roughly 14,000 new units will come on the market this year, and 8,000 next year, while absorption is projected to be about 5,500 units this year and the same next year. If so, that would drive vacancies up and put a lid on rental rate increases. For some of our speakers, it's clear that overbuilding lies ahead.

Snapped: Red Peak Properties CIO Bobby Hutchinson, KeyBank SVP Charlie Williams and Legacy Partners senior managing director Spencer Stuart. Not all of our speakers were on board with that idea, mainly because of Denver's influx of new residents—coming here because it's such a fine place to live—and its continuing ability to provide high-quality jobs for the people moving here, many of whom are apartment-dwelling Millennials. In short, absorption might be higher than a predicted 5,500 a year.

Here are Perry Rose managing partner Chuck Perry, Amstar managing director Kim Sperry and Ballard Spahr partner Joey Lubinski, who moderated. Investors are still keen to buy multifamily properties in greater Denver, and lenders want to lend for acquisition, if not quite so much for development. For Class-A in particular, it will take more than a few extra units to put a serious dent in the market's fundamentals. Denver isn't Houston, where the energy slump is slowing the pace of lease-ups.

Specifically, there's a lot of capital for long-term permanent debt, and the agencies are back after a hiccup earlier this year. CMBS and life companies are eager for Class-A acquisition deals, but there's been a pullback on construction lending among the lenders who do it; they want to see the new properties being absorbed. Affordable and workforce housing is the exception to that, with aggressive quotes on construction loans, since they're bound to be absorbed.

In general, new properties in Denver are highly amenitized, our speakers said. So much so that it's hard for properties to differentiate themselves. Nearly every property seems to have the likes of dog care facilities, bike storage and maintenance, and various levels of meeting space—those are simply the kinds of things Class-A space is expected to have. Healthy living amenities, such as walkable staircases, green roofs and gardening space are also popular, since they help decrease turnover. And, despite TODs and improved rail connections, parking is still in demand, because people still want their cars to go to the mountains over the weekend.