THE HIGH COST OF HIGH-RISE APARTMENTS
AREA ON PACE TO ADD 13,300 NEW UNITS THIS YEAR
Since 2014, three of every five apartments built in metro Denver came with rents that put them in the top one-third of the rental market, according to a 2016 analysis by Zillow.
Resort-style outdoor pools with cabanas. Yoga studios with on-demand classes. Bicycle repair stations and dog spas. Movie theaters and game rooms. ¶ Amenities like these have all but come to be expected when a new apartment building opens in Denver.
Since 2014, three of every five apartments built in metro Denver came with rents that put them in the top one-third of the rental market, according to a 2016 analysis by Zillow. And there’s little reason to believe that will change this year as Denver’s apartment construction boom reaches what many industry analysts expect to be its peak.
Some real estate experts warn that developers are creating a glut of luxury properties. But there is a silver lining to this scenario: For deeper-pocketed renters, at least, it could mean more incentives and eventually lower lease rates.
The Mile High City and its suburbs are on pace to add 13,370 new apartment units by the end of the year, according to RealPage, a national real estate software and data analytics firm. That’s well above the 8,000 to 10,000 of recent years, and nearly 11,000 apartments are scheduled to open in 2018.
Of the 21,748 units currently under construction, nearly a quarter — 5,116 apartments — are in and around downtown, according to RealPage, clustered in neighborhoods including Union Station, Golden Triangle and Highland. Denver apartment starts hit 13,251 in 2016, up 40 percent from 2015 and in contrast to a slight downward trend nationwide.
“It’s really concentrated on high-end expensive product,” said RealPage chief economist Greg Willett.
Consider three downtown projects that have opened or will this year.
Union Denver, a 580-unit apartment complex behind Union Station that will be home to a much-anticipated downtown Whole Foods Market, was advertising studio apartments Thursday starting at $1,605 per month, one-bedrooms at $2,210 and two-bedrooms at $3,195.
A few blocks away, near Confluence Park, The Confluence, a 35-story, 287-unit tower set to open this summer, listed published prices starting at $1,626 for a studio, $1,919 for a one-bedroom and $3,933 for a twobedroom.
Swing down Speer to the Golden Triangle and the 274unit Eviva on Cherokee — offering one month free on select units — had studios posted for $1,560, one-bedrooms for $1,885 and twobedrooms for $2,900.
Combined, that’s more than 1,100 new apartments — before you add in all the other high-end properties that have opened downtown in the last couple of years such as the 354-unit Skyhouse Denver, 287-unit Platform at Union Station, 314-unit Elan Union Station and 224-unit 1000 Speer by Windsor.
“What we’re delivering is a well-designed, high-quality product that is comfortable to live in,” said Brian Blackburn, development manager at Holland Partner Group, which is developing Union Denver. “We tried to think of ways to make residents’ lives easier. We feel that’s bundled into the rental rates that we’re offering.”
Too much luxury?
So, is there such a thing as too much luxury? When it comes to apartments in Denver, some industry analysts say yes.
“The market is overbuilt,” said Jay Rollins, managing principal of JCR Capital, a Denver-based real estate private equity firm that’s active in the apartment realm.
“The most important thing to remember in the luxury market is the deals that are coming out of the ground, those were born two years ago,” he said. “It was something of a lemming effect. Denver got really hot nationally very quickly and then everyone jumped in and tried to buy every piece of land and build a luxury apartment property.”
The Denver market does have a lot of what apartment developers are looking for, Willett said — a pretty healthy economy, demographics heavy on young adults and young adults who have relatively high-paying jobs and a sizable premium to buy a home versus renting one.
“Looking at those characteristics, Denver is the perfect apartment market,” Willett said.
That, of course, is in spite of the fact that rents over the past five years have risen three times as fast as the ability of people in Denver to pay them. According to the U.S. Department of Labor and Employment, rents in metro Denver jumped 34.6 percent between 2011 and 2016, while the average weekly wage was up just 11.3 percent
Denver’s luxury boom could spell disappointment for developers and investors who penciled out projects expecting certain occupancy and revenue numbers, Rollins said. For renters, it’s a different story.
“The good thing about apartments is you can price them to a point where people will live there,” Rollins said. “There will be some disappointment from the investor base but it’s to the benefit of the renters.”
The end result won’t be empty buildings but slowing rent increases, Willett said. RealPage expects most rent growth moving forward to occur in middlemarket Class B properties, while Class A buildings see flat to slightly negative pricing in the urban core and moderate growth in the suburbs.
“It’s running around 5, 6 percent, which is up from where it had been in most of 2016,” Willett said. “But as a comparison point, a couple of years ago, it was at 8 to 10 percent.”
Downtown apartment vacancy rates have practically doubled over the past few years, said Cary Bruteig, principal at Apartment Appraisers & Consultants in Denver. In the first quarter, vacancy was about 8 percent, up from 4.34 percent at the end of 2014.
“We are building them a little faster than we can fill them up,” Bruteig said.
Roughly a third of all new apartment stock proposed or under construction falls within two and a half miles of the center of downtown, he said. Of that, probably 95 percent could be described as upscale, luxury or high end.
“As vacancy moves higher, rent growth is likely to slow further until it flattens and rents actually start going down,” Bruteig said. “I think it’s a likely possibility over the next few years, that rents will actually start going down in some submarkets.”
Concessions on rise
Concessions — discounts and incentives such as two weeks’ free rent — already are on the rise. A quick scan of downtown apartment building websites last week showed concessions ranging from one to two months free.
Across the Denver area, the value of concessions hit 6.2 percent in the first quarter, up from 4.4 percent in the fourth quarter of 2016, according to the Apartment Association of Metro Denver’s quarterly vacancy and rent report.
In other words, concessions were equal to 6.2 percent of rent on average. That translates to discounts averaging $86 per month based on average rents of $1,382 during the first quarter.
Most landlords will spread out concessions over the length of the lease, said Teo Nicolais, a real estate instructor at Harvard Extension School and board member of the Apartment Association of Metro Denver.
So, say you have found an apartment for $1,200 a month and get offered one free month of rent in exchange for signing a 12month lease. Rather than just not paying rent for the first month, you’re more likely to have that discount spread out over all 12 months, reducing your monthly bill by $100, he said.
“Renters have a lot of options when it comes time to find an apartment in Denver right now,” Nicolais said. “That wasn’t the case a few years ago. We had a lot of scarcity. Apartments could increase rents and didn’t have to offer incentives. Now we’re in a different market. With the unprecedented level of new supply, we’re seeing even in the top-end buildings offerings incentives to draw residents to live there. That’s a trend we’re going to continue to see.”
The reason that recent apartment construction has titled so far toward luxury comes down to cost, experts said: Given the high costs of land and construction, it’s just easier to make a return by charging the highest rents possible.
“It’s not that much more expensive to add on some nice features and make the project current and appeal to the best renters,” Bruteig said. “If you were to build something today and strip out some of the nicer features, it would rent for considerable less but your costs wouldn’t be considerably less. “
Jesse Wojciechowski, 27, just moved into an apartment on the top floor of Union Denver a week ago. He looked at a couple of other luxury apartments in the area, but they just didn’t appeal to him.
The Tesla technician now pays $2,150 a month for what the building calls an urban one-bedroom — his sleeping area is separated from the rest of the apartment but the walls don’t go all the way up to the ceiling, he said.
His monthly rent is just $50 more than he was paying to rent a whole house in Broomfield but for him, the loss of square footage was worth it to be downtown.
“I wanted to be downtown and I wanted to be in LoDo,” Wojciechowski said. “The location was so perfect I would have been willing to pay even a little more.”
Optimism remains
Apartment developers, not surprisingly, remain optimistic about the Denver market.
The Confluence is offering a $500 construction concession but otherwise has been surprised by the strength of preleasing activity, said Bryant Nail, executive vice president at Houston-based PMRG.
“We feel we might have created something special enough to overcome any headwinds in the market,” Nail said. “We’ve actually raised rents on some of the units in this preleasing effort just because there was room there to do that.”
As of last week, they had 45 of the 287 units preleased. Apartments start around 600 square feet and go up to 3,000-square-foot penthouses with decks that are 800 square feet.
“I think the market is going to be fine. It’s going to hit a little soft patch with all these deliveries but I don’t think it’s going to be a big one or a deep one,” Nail said. “You’ve still got a lot of in-migration and you’re still creating a lot of jobs.”
Union Denver, which moved in its first residents in May, hasn’t had to offer any concessions other than subsidized memberships to Colorado Athletic Club to carry residents over until its in-house, 6,000-squarefoot fitness center opens next year, Blackburn said.
The three-tower project is opening in phases, and the first tower is already about 25 percent leased. Other amenities include an outdoor pool, 20-person movie theater, bike and ski lockers, covered dog run, 24-hour concierge desk, inhome dry cleaning delivery and smart package lockers.
“From our perspective, we would still be willing to do buildings in the downtown area,” Blackburn said. “There are still development sites that are up for grabs.”
“I wanted to be downtown and I wanted to be in LoDo. The location was so perfect I would have been willing to pay even a little more.” Jesse Wojciechowski, who moved from a house in Broomfield to an urban one-bedroom on the top floor of Union Denver