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Denver Suburbs Hot As Multifamily Development Downtown Has Become 'Death By 1,000 Cuts'

The Denver area’s suburban submarkets are seeing a flurry of multifamily development activity as residents seek more affordable housing options outside of the city’s urban core. 

But the trend isn’t likely to last. Experts said during Bisnow’s Multifamily Annual Conference held at XD2 on Wednesday that high interest rates and affordable housing regulations pose myriad challenges for multifamily investors and developers, which could lead to a slower construction pipeline over the next several years. 

McConaughy & Sarkissian's Ivan Sarkissian, Columbia Ventures Ivan Anaya, VTBS' Erik Hall, Milender White's Albus Brooks, DHA's Erin Clark and Cushing Terrell's Randy Rhoads.

Denver delivered more than 5,900 units in the second quarter, according to CBRE’s Q2 multifamily market report. Most of that activity was concentrated in suburban submarkets like East Denver, which includes north Aurora and east Arapahoe County. However, the firm cautioned that the figure is likely inflated because developers rushed to accelerate construction starts before local affordable housing regulations in places like Thornton and Arvada went into effect. 

The East Denver submarket also led other metro submarkets in total net absorption in Q2. The submarket had a net absorption of 1,714 units, more than the 1,442 units the downtown submarket absorbed, CBRE data shows. East Denver’s average rent is $417 cheaper per month than downtown, which is one factor driving residents to the area. 

Renters are facing one of the toughest economic climates in recent memory, DB Capital Management CEO Brennen Degner said at the event. Data from the Federal Reserve Bank of Kansas City shows the Rocky Mountain region had a higher average inflation rate than the national average through June, which has had a negative impact on real wages in the area. This has made it much more difficult for renters to pay the nearly $2,300 average monthly rent that the downtown submarket commanded in Q2, according to CBRE.

Degner said the myriad challenges that downtown Denver is facing at times feels like “death by 1,000 cuts” to apartment investors. He said the Federal Reserve doesn’t seem to be done hiking interest rates yet, and there haven’t been as many active sellers in downtown Denver’s multifamily market as there were in previous years. This makes it hard for value-add investors like DB Capital Management to make deals pencil out. 

“There’s just not a lot of product available in Denver right now,” Degner said. “There are some more liquid assets coming available like core and core-plus assets, but it’s getting harder to find quality assets for value-add investors.” 

The economic climate is just as unfavorable for developers, which will make it hard for them to address affordability concerns in the short term, according to FCP Senior Vice President of Multifamily Acquisitions Bart Hurlbut. Hurlbut said one of his clients saw a 90-basis-point increase in its debt costs over the span of a year because of rising interest rates. That essentially meant the project’s profitability declined by about 10%, Hurlbut said. 

Regulations like Denver’s inclusionary housing ordinance are also making it harder for developers to make new deals work, Cityview Managing Director of Acquisitions Devang Shah said. The inclusionary housing ordinance went into effect in July 2022 and requires developments with 10 or more units to dedicate a portion of the units as affordable housing. For example, a rental housing development in Downtown Denver would need to set aside at least 10% of the units for people earning up to 60% of the area median income, which is around $74K for a family of four.

Shah said the commercial real estate industry is also facing issues related to the labor force and permitting delays. In June, the Associated General Contractors of America found that Denver led the nation in year-over-year job losses in the construction industry. Meanwhile, Denver Community Planning and Development is taking between six and 11 weeks to review commercial development plans, according to the agency’s website, although some developers say their reviews have taken much longer. Those delays are occurring even though project volumes have waned over the last 12 months. 

“Getting things shovel-ready is still a big issue,” Shah said. 

Despite the struggles, Shah said he is still bullish on Denver in the long term, and projects are still getting done. CBRE found that Denver had more than 36,000 units under construction at the end of Q2, with more than 5,300 units under construction in places near downtown like the Golden Triangle and River North. 

Inventory also continues to increase in submarkets like Cherry Creek, Capitol Hill and Five Points, which combined to account for nearly 25% of all unit deliveries during the quarter, according to CBRE. That trend is likely to continue as large projects like One River North, a 187-unit development in River North, are set to deliver by the end of 2023. 

“In the near term, I think developers will need to be patient, but they should be bullish on Denver in the long term,” Shah said. “The fundamentals are still strong.”