Colorado-Real-Estate-Journal_458967

INSIDE Population resurgence, investor activity help rebalance market Market update LIHTC projects provide lifeline for affordable projects Affordable housing PAGES 29-33 Market volatility requires early decisions that reduce risk Flexible design PAGE 16 May 2025 PAGE 9 The path to stabilization: Denver MF outlook “Be fearful when others are greedy and be greedy when others are fearful.” – Warren Buffett T he first quarter of 2025 has been nothing short of tur- bulent. We’ve seen a change in presidential leadership, tariff discussions and historic swings in the S&P 500. With mar- ket sentiment shifting by the hour, investor confidence is being tested. Today’s market is more reactive than ever, largely due to the influence of high-frequency and algorithmic trading, which now accounts for an estimated 70% of daily market activ- ity. What once took days to ripple through the market now unfolds in minutes, contributing to increased volatility and fragility. So why discuss public markets in a commercial real estate context? That volatility strengthens the case for stable, long-term investment vehicles, specifically multifamily. As equities fluctuate and inflation narratives are ever-changing, inves- tors are actively seeking assets that provide consistent cash flow, hedges against inflation and less correla- tion with the public markets. Multifam- ily housing contin- ues to be one of the few asset classes that checks all those boxes, espe- cially in a city such as Denver. Denver’s position in the rental market Denver ranks in the top 5% of U.S. metro areas for median home prices, further widening the gap between the cost of owning versus renting. Nationally, the median age of first- time homebuyers has climbed to 38, an eight-year increase since 2009. This trend has created a growing and more prolonged renter pool. For multifamily owners and opera- tors, this points to a higher number of long-term renters in the pipeline. To illustrate the impact: just a 1% drop in homeownership in Denver translates to 13,600 additional rent- ers in the market. However, Denver’s multifamily market has recently felt the weight of an unusually large wave of new supply. In 2024, the city delivered approximately 23,000 new units, representing roughly 9% of the existing inventory, which is a his- toric number by any standard. In lieu of that supply, we have seen increasing vacancies and decreas- ing rents. n Current market conditions. Rental concessions are now being offered on approximately 66% of listings across the metro area. Vacancy rates have climbed to 11.8%, the high- est on record, and rent growth has turned negative, dropping 4.3% over the last three quarters. This isn’t just a seasonal adjust- ment, yet a natural result of supply and demand dynamics at work. The good news is that this is a tempo- rary imbalance. One major factor behind the surge in deliveries was Denver’s Expand- ing Housing Affordability Ordi- nance, passed in 2022. This legisla- tion mandates that new develop- ments of 10 units or more include up to 15% affordable housing. In anticipation of this policy, develop- ers rushed to push permits through before the rules took effect, which resulted in a flood of starts, many of which were delivered last year. Now, looking forward, the land- scape of development changes dra- matically. n What’s next? The pipeline has slowed – considerably. Construc- tion starts in 2024 fell by nearly 50%, and that pullback is expected to ripple into delivery numbers this and next year. Forecasts pro- jected around 8,000 units will be completed in 2025, which equates to nearly a 60% decrease from 2024 and between 3,600 to 5,800 units in 2026. As illustrated in the chart, a sharp decrease in proposed apart- ments as well as apartments under construction is indicated. That decrease should continue. This slowdown is being driven by several compounding factors: • Legislative pressure: The afford- able housing ordinance has made new development more costly and complex. • Interest rates: Elevated financing costs have changed underwriting across all product types. • Construction costs: Labor and materials remain expensive, squeezing margins. • Permitting delays: Extended time- lines add risk and uncertainty, mak- ing fewer projects pencil. n Valuation trends. With rent soft- ness, elevated vacancies, tighter capital markets, and expanded spreads over the Treasurys, values have dropped across the board. On average, Denver multifamily values are down 16% from peak pricing, with some deals seeing up to 25% declines. Cap rates have expanded, Jake Waxter Associate adviser, Pinnacle Real Estate Advisors Please see Waxter, Page 24