13 February 2015

Denver Real Estate Markets Hot

Hotels Full

The occupancy rate in the Denver hotel market is 76% (according to a Denver Post graphic that I saw in the print addition earlier this year and can't find a link for now).  While that may seem modest, it is actually the highest it has been for decades at least, and possibly much longer.  Typically, occupancy rates in Denver hotels have been between the high 40s and mid-60s, with even 70% being a strong market.  Room rates, meanwhile, are rising.

Housing Inventory Scarce

The inventory of houses for sale in Denver is about an 8th of what it was at its peak about eight and a half years ago.  In January 2015, there were 4,171 houses for sale in the Denver metro area and the average house was on the market for 43 days (in December of 2014 there were 4,355 houses on the market and the average house was on the market for just 38 days).  Usually, inventory builds up in the winter, but not this year.

In contrast, in 2007, there were 24,603 houses on the market and the average house was on the market for 105 days.  In the summer of 2006, there were almost 32,000 homes on the market.  The last time the inventory was so low was well before 2003, and the last time that the inventory was so low relative to the metropolitan area's population was even earlier.

Apartments Full

Apartment vacancy rates are also very low.  They had fallen to 3.9% last October, while rents have risen.  This was the lowest since the third-quarter of the year 2000 when it was 3.7% and is near a historic low.
Rents averaged $762 in the third quarter of 2000, compared with $1,145 during the third quarter of 2014, and up from $1,117 in the second quarter and $1,073 in the first, according to figures released Friday in the Denver Metro Area Apartment Vacancy and Rent Survey. The statistics were compiled by the University of Denver's Daniels College of Business and Colorado Economic and Management Associates.
Denver rents are still only about half of the rent for comparable places in San Francisco and New York City, however.

Market Responding

The market has been responding to the situation, at least partially.

New apartment buildings are popping up everywhere.  Northwest Denver is awash with them, especially along 38th Avenue, in the Highlands neighborhood, near light rail stations (e.g. the Gates Rubber Plant vicinity), and along major arterial streets like Broadway, Colfax and Speer, and near colleges.  One major apartment building has been completed near Speer and Washington, another is being built at 6th Avenue and Speer, and two thirty-two story high rises are in the work across from the Denver Country Club.  New housing and commercial buildings are flooding the Cherry Creek Mall and Cherry Creek North area.  A redevelopment plan is in the works with a contractor finally put in place for the former University Hospital site at 9th Avenue and Colorado Boulevard, an area that will take another hit when the massively overbudget VA Hospital is completed and that facility moves to Aurora's Fitzsimmons campus.

According to the Denver Post, "9,145 new apartments were built in 2013, 8,700 new apartments are expected to come online in 2014 and another 8,700 in 2015."

The cylindrical hotel never Sports Authority Field at Mile High is being converted to studio apartments, another hotel about a mile to the North has been converted to Auraria Campus student housing (as has a hotel near the Denver Performing Arts Center downtown), and a number of 1950s motels on state highways (like Colfax Avenue) have been converted to transitional housing for families who were homeless and into permanent apartments.

Many existing apartment buildings are being refurbished and updated to compete.

Many new hotels are being opened.  Inventory will expand by 1,700 rooms (3.8%) in 2015.

The past decade or so has seen the intense gentrifcation of Northwest Denver which has finally crossed a critical mass threshold, and North Denver is gentrifying in a swath that runs from I-25 all of the way to Quebec Avenue (where the Stapleton neighborhood begins).  The Northfield neighborhood of Stapleton is starting to fill out, as is the gentrifying Ballpark neighborhood near Coors Field, the River North neighborhood between downtown and I-25, and an "airport city" in and around Denver International Airport (DIA).

Denver proper makes up only about a quarter of the total population of the metropolitan area and is almost entirely landlocked.  Yet, it has consistently issued more than half of the metropolitan area's building permits over most of the last decade or two.

Single family home construction and condominium construction have been slower to come back.

Is Construction Defect Liability Discouraging Condominium Construction?

Condominium projects have been particularly scarce.  The Colorado General Assembly is debating a bill to make it harder for HOAs to sue builder of the projects.  The bill addresses allegations that condominium projects are scarce (which they are), not due to market forces and the availability of financing, but instead because HOAs of newly built condominium projects are too prone to bring construction defect litigation against builders.  They argue that this has driven up insurance costs, making apartment projects more attractive.

But, few, if any, examples of suits that were not meritorious have been offered to proponents of the law. Colorado already strictly limits construction defect lawsuits in general.  And, this theory fails to explain why a demand for condominiums isn't satisfied by converting apartment buildings into condominiums which is a fairly easy process that involves almost no exposure to that kind of liability.

Alternative Office Space Growth

There is office building growth as well. Open plan multi-tenant home office away from home situations, in the tradition of the campuses of the big players in the tech industry and business incubators, are also filling up as fast as they can be opened, although they still make up only a tiny share of the overall office market.

Why Is This Happening?

A number of reasons have been advanced for the boom.

Migrants are moving to Colorado at above average rates.  Our economy is healthier than many other places and the new marijuana industry has tightened up the real estate market while it was floundering elsewhere.  Colorado also took an earlier and lighter real estate bust than many places during the financial crisis and Great Recession.

Great Recession booms in foreclosures took people out of home and condominiums and put them into apartments, tightening up that market.

A financial crisis driven slowdown in construction to a near standstill allowed existing supply and inventory to be used up.

The recovery has allowed suppressed demand to form new households and put them in new homes to be realized.

Conventional mortgage interest rates below 4% for buyers with good credit has encouraged buyers to snap up inventory.  More generally, nationally driven shortages of financing during the financial crisis that shut down projects in Colorado even though local fundamentals didn't justify the tighter lending environment here, has ended.

Finally, there is a long term secular trend towards an inversion of the socio-economic geography of housing.  Affluent people are moving back to cities for a variety of reasons, while the poor are leaving central cities to get more housing for less money further out.  Drive until you can afford it has become the new mantra for working class and middle class families.

Also, Denver, in particular, has embraced development, rather than working hard to suppress it.


andrew said...

More on the condo construction defect issue at Colorado Pols.

Kevin Dickson said...

"70% hotel occupancy is a strong market"

I think that shows a real problem with the hotel business model. My long term rentals have a 96% occupancy rate.

Airbnb and HomeAway seek to reduce real estate vacancy by (at least) filling your house with paying tourists while you go on your own vacation.

Yet City Council is on the verge of regulating this disruptive innovation.