Denver's Multifamily Boom Is Still On, But There's Never Been So Much Uncertainty

As Denver tries to maintain its booming multifamily market, there is uncertainty on many fronts: the new administration, the direction of the economy and the possibility of overbuilding locally.

Our Denver State of the Market event kicked off with Aimco executive vice president Patti Fielding, who talked about Aimco's successes. She said her company has four primary objectives: operational excellence, as reflected by 51% retention, the highest in the multifamily sector; redevelopment, for which the company invests $200M to $300M a year, getting a return of $1.40 for each $1 spent; portfolio management, covering a geographically diverse array of A, B and C properties; and a strong balance sheet.

The REIT does not create cookie-cutter developments, Fielding said, but product that drives target customers to live at the company's properties and stay there longer. The company's redevelopment pipeline is robust, but it is flexible enough that projects can be slowed down or sped up as local market conditions warrant. "If the market doesn't accept a product, or we don't achieve the rental levels we thought, we can change the design to meet the target customer needs."

Historically in Denver and Boulder, about 9,031 units have been absorbed per year. For the first time in 20 years, there has been more supply than absorption projected for the next two years. "That doesn't scare us too much," she said, since both of the company's current projects, Eastpoint and 21 Fitzsimmons, are in strong locations.

Our speakers said the reception for mixed-use developments, in terms of getting official approvals and community support to make projects possible, varies from place to place in the Denver region. There is a fair amount of push-back in some places against new projects, partly because there has been so much of it lately. People are fatigued with change. 

A lot depends on the scope of the project and the diligence of the developer in working with local officials and trying to educate residents about the project. The goal is to craft a development that represents the right kind of change, and engage with the communities early and often, and listen to what they have to say. They cannot be persuaded if you do not know where they are coming from.

The speakers expect light rail to continue to spur development, especially in mixed-use and even affordable projects, because parking requirements can be less for TOD developments. There is also strong and persistent demand to be near transit, particularly among many of those moving to Denver who are used to living in places with transit. Transit nodes are advantageous for new development in that they tend to have a mix of uses around them already, so mixed-use projects do not have to be quite as amenitized as a result.

A lot of affordable housing deals are on hold because of uncertainty in financing. Tax credits are increasingly competitive. The market will adapt, the speakers predicted, and developers will make it work, because the demand is still there. But it is going to take time to sort things out, for developers to find capital sources to fill the new gaps or find new ways to cut costs.

The capital markets speakers said they heard concern at MBA's annual meeting recently that markets are close to the top, though most attendees were optimistic about multifamily development. FHFA is still committed to keeping liquidity available in the multifamily sphere, and this year will probably still be business as usual in market-rate multifamily finance, though there are persistent questions about what the administration will do.

The impact of what the Fed might do this year — which would be a front-and-center question in normal times — is taking a back seat to investor expectations about the new administration. Will there be a tax cut? Will there be deregulation? What will the details be? There is a lot going on, and all of it could affect the capital markets. The problem is, no one knows the details.

Lenders and investors do not like uncertainty, and it is causing executives to put off decisions or make bad decisions, the outlook speakers said. There is some risk of a recession, so the outlook for multifamily development, even in a robust market like Denver, is uncertain. A recession ahead could mean an overhang in supply. 

Still, there are signs that development is self-correcting in anticipation of a slowdown. Some 23,000 units are under construction in Denver, and 20,000 are contemplated, but most of those probably will not happen — which would be a good thing, especially if fewer higher-end units are delivered.

Until supply is eaten up, however, it will be a tough slog with increasing competition among landlords for tenants going forward. Overall, there has been amazing rent growth in the market, but now there is downward pressure on rents. Long-term, Denver still has serious upside potential in rents, but in the next few years there will be some bumps.

One of the silver linings of less development in the near future is that it is hard now to find construction workers. Younger workers are not entering the field to replace those leaving it. Going forward, responsible deregulation in construction industry could be a positive, but even so there is a serious labor concern in the industry.