APARTMENTS RISE IN SUBURBS, COMPETE WITH DOWNTOWN
Thousands of units going up in suburbs for high-end renters
Some analysts expect the pandemic will unleash a shift in apartment construction away from luxury units in the urban core, which have dominated the past 10 years, to more affordable units in smaller buildings out in the suburbs.
But apartment construction numbers from RENTCafé and Yardi Matrix show that trend may already be well underway in metro Denver/Boulder, which managed to put three cities on the list of the 20 U.S. suburbs with the most robust apartment construction over the past five years.
“For the last 10 years, the sweet spot has been to build upper end discretionary in the urban core,” said Doug Ressler, manager of business intelligence at Yardi Matrix.
Denver remains a national leader in urban apartment construction, even as its suburbs ramp up. But its dominance is slipping slightly, from about eight out of 10 apartments built to closer to two out of three.
Parker, Longmont and Westminster added more than 2,100 units each between 2016 and 2020, ranking those cities in spots 18 to 20 among U.S. suburbs for the largest number of new apartments built. Unlike the downtown highrises, the apartments in the Colorado suburbs are 93% garden-type buildings
“Over the last few years, about a third of the new construction pipeline has been concentrated within a 2-mile radius of the center of downtown Denver. That means a lot of apartments have been built in the suburbs, but there are a lot of suburbs,” said Cary Bruteig, who tracks Denver’s multi-family market at Apartment Insights.
Bruteig’s research lists Interlocken as the region’s hottest suburban market with 1,989 apartments under construction and 3,668 in the planning stages. Wheat Ridge is buzzing with activity, with 1,657 apartments under construction, but less than a third as many in the pipeline, 502. Thornton and Northglenn are also seeing robust construction, with 1,135 units under construction and 2,095 in the planning stages.
Denver’s Central Business District, however, remains the epicenter, with 4,583 apartments under construction and 10,314 in the planning stages, per Apartment
Insight’s counts. Northwest Denver is also buzzing with 1,483 apartments underway and 2,750 in the pipeline.
When looking at Denver versus the rest of the metro area, there were 26,000 apartments built in Denver, versus 15,000 in the suburbs, during the past five years, according to Yardi Matrix. Boulder by contrast built 1,100 apartments, while its suburbs built 3,100.
Yardi Matrix estimates that metro Denver grew its apartment supply by 4.1% in 2020 through November, which is double the 2% annual growth rate measured nationally. Of the 57 projects completed through November, the vast majority targeted the lifestyle segment or renters by choice, while only 13 were designed for renters by necessity or those seeking units affordable on a lower wage.
Ressler notes that some suburban projects imitate the walkability and social vibe of downtown areas, and are going after the same young adult renter. Downtown Westminster, which is being built on the site of the old Westminster Mall, is a case-in-point.
The Ascent apartment development offers 255 luxury apartments and is 94% leased even with the pandemic raging. Its sister project Aspire is looking to provide 226 luxury units by May or June.
“We are very pleased with how things are going in Westminster and look to continue growing our market in that area,” said Richard Kiemen, senior vice president of construction with Sherman Associates in Minneapolis, the developer of the two projects.
Kiemen said Sherman isn’t opposed to future projects in downtown areas and has two underway in the heart of Minneapolis. But the opportunities that have presented themselves in metro Denver are increasingly coming up in the suburbs.
Downtown Westminster also has a development called 8877 Eaton St. with 118 units of incomerestricted or affordable apartments. The development used Low Income Housing Tax Credits, whiched allowed it to provide rents “well below” market-rate competitors and fill up in just five months, said Carl Koelbel, chief operating officer at Denver-based developer Koelbel and Company.
Job losses and business failures because of the pandemic are expected to only amplify the need that households will have for more affordable housing. But much of the focus in metro Denver has been and remains on the luxury segment.
Nationally, 37% of apartments built the past five years were highend, with 61% considered mid-level and 2% affordable, according to Yardi Matrix. But in Denver proper, that ratio was flipped. About 62% of the apartments added were high-end, while only 34% were mid-level and 4% were affordable. Denver’s suburbs built 42% highend and 58% mid-level.
Boulder was different, with a nearly even split between highend and mid-level in the city. But when it came to Boulder’s suburbs, nearly three-quarters of the units were mid-level.
Teo Nicolais, an instructor at the Harvard Extension School and local real estate investor, thinks that can be explained by the lack of developable parcels in Boulder and a less favorable view of the kind of high-density construction Denver allows. There is such a shortage of housing that even midlevel units without all the amenities can command high-end prices in Boulder County, he said.
In central Denver, land is more expensive than in the suburbs, garage construction is needed to provide parking spaces and more amenities are required, like swimming pools, to stay competitive. That pushes developers to build luxury units that can provide a higher rent, and zoning accommodates the higher densities needed to make the math pencil out.
“The forces which skew urban core development towards luxury units are the same that skew suburban development toward midlevel and low-end development,” Nicolais said.
Urban vs. suburban
So will the pandemic allow suburban apartment construction to dominate over urban? Some developers think so and are investing in that direction.
“It will take time for the urban apartments to gain popularity back since part of their desirability was the proximity to restaurants and other services which have been decimated by the lockdowns. It will take years for these services to come back, if they ever reach pre-pandemic levels,” Koelbel predicted.
The loss of so many restaurants and retailers and cultural amenities in downtown areas could give suburbs a leg up, especially if renters continue to put a premium on having the additional space and easier access to outdoor activities.
Rents in major urban markets, including San Francisco, Manhattan, Boston, Seattle and Washington, D.C., fell sharply last year, according to a report from Realtor.com. San Francisco rents on a studio apartment were down nearly 34%, while one-bedroom apartment rents were down 25.5%.
Nationally, the median rent for studio apartments was down 0.7% year-over-year, while one-bedroom rents on average were up 0.8% and two-bedroom rents were up 2.6%, according to the Realtor.com study. Rent gains in smaller rural and suburban markets helped stabilize the overall averages.
“With more flexibility and more time at home, renters have sought out extra space, driving up rents in the suburbs and less dense markets. As vaccines are being rolled out nationwide, the question is, how much longer will these trends continue?” Danielle Hale, Realtor.com chief economist, asked in a release.
Ressler said he is studying the topic and said it is too soon to declare that multi-family development will pivot hard to suburban apartments. His research shows that many renters who left the San Francisco peninsula during the pandemic, contributing to plunging lease rates, moved just across the Bay into the Oakland area, where they could get more space at a lower price.
Unlike some types of real estate, rents on apartments can adjust quickly. Declines of a quarter to a third could set the stage for a rebound as the pandemic eases, especially among young renters looking for a bargain, and that appears to be happening already in Manhattan.
“We found that it is not as significant as some people paint it. The market is price sensitive,” Ressler said. He describes the attitude among developers and those funding them as “wait-and-see until we get more stability.”
Ressler said in the end money talks. If developers can make a better return on their investment building downtown luxury units, they will keep doing that. And if it looks like they can get a better return building apartments for workers in the suburbs, they will shift and do more of that.