As a real estate investment management firm, we keep apprised of changes in local housing policies in the cities where we have investment communities. Denver has attracted attention lately for its efforts to bolster affordable housing in the local market. Developers tend to be wary of these kinds of regulatory moves, but Denver’s new program is a year old now, and it seems the multifamily real estate market in the city is looking better and better.
While it is too early to draw definite conclusions about the program, the impression at this point is that Denver has found a way to increase much-needed affordable housing in the multifamily rental market and do well by developers and investors at the same time.
Denver’s Affordable Housing Fund
In September 2016, the Denver City Council approved an affordable housing fund that would raise $150 million over a decade to develop or preserve 6,000 homes for low to moderate-income families. The fund is paid into equally by a voter-approved property tax and a one-time new development fee based on the area of the construction.
The new fund replaced the city’s 2001 Inclusionary Housing Ordinance (IHO), which required developers building more than 30 units to include 10% affordable housing onsite or to make a payment in place of it. Over the years, developers began to depend more heavily on cash payments, causing the efficiency of the program to decline rapidly. While more than 700 units were provided by IHO in 2003-2005, not even half that many were built in the following decade. Importantly, IHO applied only to for-sale housing and did not apply to rental housing.
The new fund collects money from multifamily rental housing as well as for-sale housing. In Denver, 60% of housing permits are for apartments. Multifamily housing construction is thriving, and with the city’s population expected to grow 9.5% from 2015 to 2020, development is expected to continue to escalate to keep up with demand.
Denver Multifamily Real Estate Development Boom
According to the National Real Estate Investor website, which named Denver No. 8 on its list of Top Markets for Apartment Construction in 2017, 11,190 new apartments will reach the market in 2017, driving vacancy to 5.5% by year-end, up from 4.6% at the end of 2016. Rents are also rising at the third-highest rate in the country, up 52% between 2005 and 2015.
We see a flourishing multifamily development market that is being driven by economic growth. The Denver metropolitan area saw 2.9% job growth in 2016, well above the national average of 1.7%, and it is expected to reach 2.4%, or 39,000 jobs, this year.
The City of Denver in Action on the Housing Market
The city has insisted that the affordable housing fund will generate fewer funds than IHO and spread out expenses across a broader base of payers, but developers were unconvinced by those claims. There was a rush on permits at the end of 2016 to avoid the new fee and, as a result, the city is projected to collect only $800,000 of the $3.5 million it was expecting this year.
Denverites are undaunted, however. There is a variety of new measures still under consideration. One that would affect multifamily housing is a proposal put forward by Mayor Michael Hancock to fill 400 vacant luxury apartments with low- and middle-income families using vouchers to make up the difference between the market cost of the apartment and the families’ abilities to pay.
A number of companies, including Chipotle (which is headquartered in Denver), Comcast, and Colorado Health Foundation, have expressed their willingness to participate in the program, and affordable housing fund money would be used, as well. There will be a two-year pilot program to work the details out before it becomes permanent. Currently, the program is structured so that landlords apply online to the city to have their apartments filled.
This program could be a great boon to luxury apartment owners, ensuring lower vacancies and a more stable cash flow. Otherwise, the main advantage adequate affordable housing holds for luxury property owners is that Denver’s growing, healthy market will not be weighed down with an unbalanced supply of housing options.
Denver’s city planners are clearly trying to align the interests of developers, property owners, and residents. This approach should help its multifamily real estate market continue to thrive and, at the same time, keep the city’s neighborhoods viable and dynamic. Denver is an attractive market for investment, and is likely to remain so for several more years.
CWS Capital Partners has four multifamily investment properties in the Denver area. Our experts know the city’s markets and are ready to assist you in implementing your investment plans.
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