Posted: 03/27/2011 01:00:00 AM MDT

An apartment building boom is on the horizon as increasing demand for a limited supply of apartments pushes rents higher and gives developers and investors an incentive to start building multifamily projects.
Investors, meanwhile, are eager to finance new projects.

"There is an institutional desire to have multifamily as an asset class," said Marcus Mollmann, president of Reliquid Capital Network, a Greenwood Village-based online network that connects those seeking capital for commercial real estate projects with those who provide it.

After a steep dip in the number of apartments constructed last year, a flurry of new projects has been announced for metro Denver in recent weeks. At a recent multifamily conference, developers projected that 2,500 apartments would be delivered in the Denver metro area this year. That number is expected to double to 5,000 next year.

Denver's situation mirrors a national trend. The number of units expected to be added to the nation's apartment supply is expected to jump from 22,536 this year to 94,588 next year and just over 109,000 units in 2013, according to CoStar Group, a Washington-based commercial real estate research firm.

"We're currently building at a 50-year low," said industry veteran Tom Toomey, president and chief executive of UDR Corp., a Denver-based multifamily real estate investment trust. "There's no question that number could triple in a very short window. It's nowhere even near the size and scope of the demand equation."

Vacancy rate at decade low

Last year, just 498 apartments were delivered to the market in the entire seven-county metro area, but developers received permits for 1,001 units, according to a survey by the Colorado Division of Housing.

At least 1,000 new units currently are planned in and around downtown, said Brian Phetteplace, manager of retail and residential development for Downtown Denver Partnership Inc.

"In downtown, we're seeing tightening vacancy," he said. "Buildings that were built 2006 and 2010 are absorbed. Incentives are being burned off, and we didn't have overbuilding. The next wave of development can come in and respond to the market."

By the end of the year, the apartment vacancy rate in metro Denver is expected to slip to its lowest level in a decade, allowing owners to raise rents and scale back concessions, according to a report by Marcus & Millichap.

Metro Denver's vacancy rate was 5.5 percent during the fourth quarter, according to a survey for the Colorado Division of Housing.

At the same time, land is easier to come by, construction prices are down about 10 percent and contractors are eager to take on the work, said Mike Kelly, president and co-founder of Caldera Asset Management, a multifamily consulting company.

"You don't have the craziness of anybody being able to tie up land," Kelly said. "Builders are building a lot quicker because they don't have any other projects."

Investors and developers are focused on high-end or affordable, deed-restricted projects, but nothing in between, said Gordon Von Stroh, professor of management at the University of Denver's Daniels College of Business.

Luxury projects are appealing to developers because they bring in higher rents. There is funding available through the Colorado Housing and Finance Authority for affordable projects.

"You could really call it a dichotomy," Von Stroh said.

Demand resurfaces

The meltdown in the housing market found developer David Zucker rethinking his 2020 Lawrence condo project in late 2008.

Originally, Zucker planned for a 62-unit condo project. Now, with financing finally in line for the deal and the acquisition of an additional 25,000 square feet of land, he's building a 231-unit apartment building.

"We are very much focused on affordability, on rental and on converting this to what I like to call the first project in downtown Denver conceived after the end of the gilded era of 2007-2008," Zucker said.

Developer Randy Nichols plans to break ground by the end of the year on a 307-unit apartment project in the Central Platte Valley. At the moment, Nichols is weighing a variety of financing scenarios and is in conversations with King Soopers and Safeway about opening a 43,000-square-foot grocery store.

"We're getting a lot of interest from financing sources and joint-venture partners and that sort of thing," Nichols said. "I think since Union Station and FasTracks and all that began, the level of interest has increased dramatically. That combined with the renaissance of the apartment business makes it a pretty hot commodity right now."

Steve Rahe and Tom Wanberg of Grubb & Ellis are close to selling a transit-oriented development site at South Lincoln Street and Interstate 25 to an apartment developer. They're also talking to the owner of a multifamily site in southeast Denver about marketing the site to apartment developers.

"We feel like the demand from developers resumed in January," Rahe said. "Last year, there was no interest in these sites. This year there is lots of interest in these sites. The quick turnaround has been amazing."

Institutional investors want to finance projects because they can't buy existing apartment buildings.

"If they can't buy it, the institutional capital has said there's an appetite to build to increase its holdings in multifamily," Mollmann said.

Margaret Jackson: 303-954-1473 or mjackson@denverpost.com

Key messages for homes. Two rounds of tax credits make comparisons difficult, but it looks like the post-tax credit hangover might be about finished. However, 2011 will probably look a lot like 2010 (or perhaps bit worse), with a broad housing recovery starting in 2012.

Showings fell dramatically after the expiration of the tax credit on 4/30/10. Centralized showings reporteda 42% drop in showings across all 25 states on 5/1/10. January 2011 showings were the best we have seen since the tax credit expired.  After very high showing activity during the tax credit, the average showing per listing crashed in the spring and summer. Activity in 4Q '10 picked up modestly. Recent activity is reasonably consistant across different price points.  The number of DSF+CND under contract reached a record low in Dec 2010. Overall, the Denver market had five months of inventory on 1/1/11. The holidays always mark the low point of the year for inventory. This is about 10% less than the inventory on 1/1/10. Note the inventory increases from the lower prices points to the higher price points.  MOI hasn't really changed this time last year, but the mix changed a lot. The tax credit last year depleted small home inventory and ran up prices...while the high end was neglected. This year has a much more balanced inventory... and appreciation has been more balanced, too.  Historical contex - we've been through this before. The average Denver home price from 1971 to 2008 has mostly been a march upwards: about +6% per year. Prices are off 16% from their peak. Prices stabilized in 2009. It's too early to conclusively say we're past the bottom, but it does look encouraging.  2008 prices eased -13% compared to 2007. Much of this is a mix issues. Prices were essentially unchanged between 2008 and 2009. Prices increased +7% between 2009 and 2010. The number of sales of smaller homes declined while larger homes remained relatively steady - so the "appreciation" was a mix change. Jan '11 was up +7% from Jan '10 Denver Metro - Average Home Price $283,000. Number of home sold - volume has declined since 2005. 2009 has a -16% decline in volume relative to 2008. Volume in 2010 declined a further 10%. Note the impact of the tax credit on the timing of sales in 2010. Jan '11 volume was -6% from Jan '10. Regular sellers have the most seasonality. Distress sales include foreclosures  and short sales. The number of foreclosures has been declining and the number of short sales has increased.  The cheaspest homes are seeing less distress sale activity. The most expensive home have seen an increase in distress activity. For the most expensive 10% of homes, the distress 'market share' increased from 11% to 18% in just two years.  Denver Metro average home price by month. Prices in 2008 were lower than 2006 and 2007 for every month of the year. 2009 had a rough start but finished strong. 2010 prices were markedly better than 2008 and 2009. Number of homes sold by month in 2005 to 2010. 2009 was the worst year in recent memory; 2010 has been impacted by the tax credits. Dec '10 was strong but Jan '11 was not.  While Denver's population has streadily grown since 1997, the number of non-distress (e.g., no REO or S/S) DSF deals has been plummeting since it's '04 peak.  There is almost two years woth of transactions in the pent-up demand backlog...

Observations

We took the number of DSF sold divided by the Denver Metro population to calculate the number of home sold per thousand. Between 1997 and 2002, there were 14.2 DSF non-distress (e.g., no foreclosures or short sales) sales per thousand citizens, on average. We could define "pent up demand" as the gap between our expect non-distress sales and what we have actually seen in the market, from 2005-2011. It amount to 45,000 units of pent'up demand (about two years of sales)

Guesses

Historically, Denver has had 14.2 non distress DSF sales/thousand people. Lately, it's been about half that, or 7.7. If we recovered half of the gap in 2012, wer would sell 10.9 non-distress homes per thousand. Assuming distress sales decline a bit in 2012 (say 25%), our total DSF sales in 2012 would be 37,300, Total DSF sales in 2010 were 25,500, and only 14,800 were non-distress! That would increase market for regular listing sales from 14,800 to 29,500 (+98%). This amazing increase still wouldn't be as many as we sold in 2005... so it's not a competely unreasonable guess. Don't give up!

Source: Your Castle Real Estate (analysis): Metrolist and Metro Denver Economic Development (population data). Note: Distress includes short sales and foreclosures.

Top 20 states by foreclosure rate in February