WESTERN SNAPSHOT, OCTOBER 2007

Denver Multifamily Market

The Denver apartment market is expected to make continual improvements throughout this year, supported by above-average job creation and limited supply growth. While much of the nation is expected to slow with respect to job growth, the Denver metro area is expanding, albeit modestly. This year will mark the fourth consecutive period of economic expansion, with the highest amount of growth expected in the Mile High City’s leisure and hospitality sector and the high-paying business and professional services sector. Combined, these two industries are expected to create 55 percent of the new positions in the market this year. The health of Denver’s economy is further evidenced by the widespread expansion, as nearly every sector is anticipated to post job growth, with the exception of the construction industry.

While a healthy local economy may lead some to expect an increase in rental stock, apartment development remains subdued. This year, completions are expected to run nearly 80 percent below the 5-year average, causing metrowide vacancy to fall to its lowest level since 2002. As a result, owners will begin to raise rents at a measured pace, with growth projected to accelerate going forward.

The investment sector will maintain the interest of both local and out-of-market investors, keeping transaction velocity at current levels. Premium assets in Class A locations will continue to command cap rates in the low 6-percent to high 5-percent range, as institutional investors purchase at low initial yields, while underwriting future rent growth.

By the numbers, developers are expected to bring approximately 900 apartment units to the Denver market in 2007, down from the 2,400 units that came online last year. A cooling for-sale market and the ongoing subprime mortgage fallout will keep residents from migrating into homeownership, supporting apartment demand well into 2008. New completions will remain below the long-term average, fueling a 30 basis point improvement in vacancy to 8 percent by year’s end. Job growth and constrained apartment construction will support strong demand-side fundamentals. Early estimates show asking rents ending the second quarter at $856 per month, up 1 percent year over year. Stabilizing market conditions have allowed owners to curtail concessions, as effective rents have advanced 1.5 percent over the same period to $760 per month. Asking rents for the metro’s Class A properties have risen 1 percent during the past year to end the second quarter at $1,031 per month. In line with upper-tier assets, rent growth in Class B/C properties was up 1 percent to $711 per month in the second quarter. Over the past year, gross revenue has increased 2 percent as a result of slight improvements to occupancy and rents.

Investment sales velocity has maintained consistent and at-peak levels during the past 12 months, as local and out-of-market investors have continued to target the growth prospects of the Denver market. In the past 12 months, the median price has remained unchanged at $66,000 per unit. Cap rates year over year have averaged in the mid- to high 6-percent range, approximately the same as 1 year ago. While transaction velocity has held firm, recent transactions in the low 6-percent range suggest further cap rate compression may occur this year. Class A assets will continue to receive high valuations and are expected to be targeted by institutions looking to place capital within a growing area. Lower-tier properties, meanwhile, are expected to offer local investors the ability to buy on higher initial yields with opportunities to consistently raise rents. Smaller, private buyers may want to evaluate Class B/C assets that can be acquired at cap rates nearly 100 basis points above other western metro areas. Additionally, investors will want to monitor construction in the affluent Lakewood-South submarket, which is expected to receive more than 15 percent of the metro’s deliveries in the next 3 years.

Given the healthy economic conditions permeating the Denver market, it’s an excellent time for investors to acquire apartment properties, especially in light of the recent credit market crunch, which will force a larger number of homeowners back into the renter pool well into 2008.

Adam Christofferson is vice president and regional manager in the Denver office of Marcus & Millichap.

FREED BRINGING METROPOLITAN GARDENS TO DENVER The mixed-use, transit-oriented Metropolitan Gardens in Denver Great cities are vibrant, vital places, full of activity. Metropolitan Gardens in Denver will offer the ideal combination of all these things, fusing places to live, shop, work, play and visit into a single destination. Joseph Freed & Associates is developing the expansive mixed-use community, teaming up with Cherokee Denver LLC, a wholly owned subsidiary of Cherokee Investment Partners, the site owner. Metropolitan Gardens is located on a 40-acre brownfield parcel on the site of the former Gates Rubber Factory, just 2.5 miles south of downtown. With multiple access points from two of Denver’s main thoroughfares, Interstate 25 and Santa Fe Drive, Metropolitan Gardens is perfectly located to capture the interests of approximately 450,000 people per day that pass the property. This urban, transit-oriented development is also located adjacent to the I-25 & Broadway station, a multi-modal hub that serves an additional 41,000 transit riders per day. Furthermore, one of the city’s busiest bus transit terminals is also located right at the doorsteps of the project. “This site is one of the first properties in the United States to be selected as part of the LEED ND pilot program,” says Steven J. Jacobsen, senior vice president of Joseph Freed & Associates’ development/special projects. “We believe that sustainable architecture is not only the right thing to do but also makes good business sense.” Cherokee is well known for investing in brownfield sites and is currently in the process of completing the above and below-grade remediation. As part of the infrastructure improvements, Freed, in connection with the city of Denver “Metro District,” will be constructing a vehicular bridge across the South Platt River, building major utility and road improvements as well as two pedestrian bridges over the light rail tracks, which will ultimately connect to five separate light rail lines. “We really are creating a city within a city,” Jacobsen notes. “The daytime population of our site alone will be approximately 10,000, and within the immediate area, it is going to be well over 150,000.” The development will contain more than 1 million square feet of retail, from big box tenants along Broadway to smaller boutique tenants in buildings on the east side, which will have a more historic flavor through the developer’s preservation and redevelopment efforts. Preserving and restoring many of the former rubber plant’s original buildings, these historic structures will house retail tenants, restaurants and brew pubs. Sundance Cinemas LLC has signed a letter of intent to locate its fourth theater in the U.S. to the site. Other retailers will include those with local flavor, mountain shops, sporting goods stores and European retailers that are new to the Denver market.  “This is truly an urban city that we are creating: so what does it need?” Jacobsen asks. “It needs a grocery store, a movie theater, an entertainment area with restaurants along with neighborhood shopping. What we are doing is creating a place where people want to live, shop, eat, be entertained and play.” Along with the retail component, the project will feature 850 apartments, 1,300 for-sale condominiums, two hotels with 150 guest rooms each, and approximately 610,000 square feet of office space and abundant parking. There will be a signature office tower totaling 210,000 square feet, as well as abundant flex space, which will benefit both retailers and small office users. For example, if a cosmetics and beauty retailer wanted boutique space on the ground floor and a salon above it, the second-floor space could be fitted for that purpose. It will also serve smaller businesses, such as advertising agencies and law firms, that want to be located downtown but can’t afford typical rents. The first phase of retail, residential and office should be complete by fall 2010.

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