Eyes on the Upside Investors have continued to like Denver apartment properties, despite the region’s economic challenges of the past few years. They see an upside potential in this Rocky Mountain market, a vision that has prompted many buyers to acquire assets at a premium during this time, locking in low interest rates and positioning themselves for an improving market.
As such, cap rates have steadily declined across all apartment classes in the region. The average cap rate at the end of 2004 was 7 percent. Pricing climbed 5 percent during that same year, to a median of more than $65,000 per unit.
Institutional activity has played a big part. While Fairfield Residential and Legacy Partners have been sellers, multifamily companies such as Equity Residential, AMLI, and Forest City all acquired Denver assets during the past year.
Investors interested in upside opportunities might investigate properties in Denver’s south and west central submarkets, where occupancies are expected to improve once the economy
Conversely, investors seeking stability over cash flow might look to Boulder, for properties near the university or in the more affluent outskirts of this Front Range community. It’s an appealing combination: Vacancy rates in these locations are among the lowest in the Denver metro area, while Boulder-area rents are the region’s highest at $970 monthly.
Transaction velocity for 2004 surpassed that of each of the previous two years, and per-unit prices set new records—both trends that are forecast to continue in 2005. Also, as single-family home prices continue to climb in the Denver area, demand for condos has increased. As such, conversion opportunities may exist in infill locations, where apartment buildings can be repositioned with upgraded amenities and sold as condos.
On the Fast Track Those who prefer to develop multifamily properties will want to keep close tabs on Denver’s latest infrastructure improvement: FasTracks, a $4.7 billion, 12-year transportation project that will provide 119 miles of rail corridors throughout the metro area.
Speculative investors might want to seek properties along or near the proposed rail lines for future redevelopment, potential repositioning, or asset appreciation opportunities. Properties in and around the two Lakewood submarkets might be of particular interest, as revitalization in the Belmar neighborhood has experienced tremendous success. The Lakewood area boasts the lowest vacancy in the region, as proximity to downtown and relative affordability make it any easy choice for commuting residents.
Overall, Denver’s apartment market has begun to rebound, but it has not yet fully recovered, as concessions remain commonplace. Still, the long-term upside potential of this Rocky Mountain metro and its surrounding suburbs continues to lure investors and drive transaction volume. Increasing job growth and below-average construction activity are also bolstering improving apartment market fundamentals. These trends will further enhance the position of the Denver multifamily market once its economy improves and its job growth hits full stride.
–Linwood C. Thompson is managing director of Marcus & Millichap’s National Multi Housing Group. He is based in the firm’s Atlanta office.