A common question posed at real estate conferences, happy hours, client presentations and even on prospecting calls is – where we are in the economic/multi-family cycle? 5th inning? 9th? Extra innings? These are all different things we hear from different owners, lenders and economists. The U.S. economy is currently in the second longest expansion in history only trailing the expansion that lasted 10 years from 1991-2001. Naturally this information scares people and investors as they look for the writing on the wall that a recession is coming. Being able to time the market and the overall economy, and “get out” before the next recession is the dream of all investors, but no one truly knows where we are in the cycle.
There are always common factors that signal an economic downturn such as rising interest rates, housing prices, unemployment, and the flattening of the yield curve that many people like to watch and predict. There are also things to watch such as deliveries and absorptions in a particular market to try and help determine when a market “shift” may be coming. Unfortunately, the truth is cycles are an event driven phenomenon. The biggest risk to the current economy is one we cannot predict. That risk could be environmental, political or economic that we do not see coming. When it hits, it will affect the nation and Denver will likely follow right behind the nation into a recession. Each market handling of said recession is always different. Some markets took a very long time to recover from our last downturn where Denver proper came out of the recession rather quickly.
The single-family residential market also plays a role when looking at the multi-family cycle. The two are closely related and we believe the high barriers to entry, coupled with the living habits of millennials, point towards a strong multi-family outlook. It is no secret that an individual needs a strong financial background to be able to purchase a home in the Denver MSA currently. Along with that, many young people are investing in other ways than real estate and would rather have the ability to move around than lock themselves into a home purchase and mortgage.
Another factor to consider is skyrocketing construction costs in today’s market. While it does seem like a new crane pops up every day in the Denver skyline, many investors are opting to buy and renovate existing assets instead of ground-up construction. As a result, rents are rising the fastest in 1970’s and older product as owners renovate these units to compete with new Class A and B apartments.
All that being said, we are currently cautiously optimistic about the fundamentals of the U.S and local economy and how that relates to multifamily investments. Employment growth is strong, the state is hitting record absorption levels of multi-family units and vacancy is declining. Another factor that we believe is continuing to drive the market is the access to capital. There is not a shortage of public, private, or individual buyers for multifamily apartment buildings. Investors are willing to take lower returns because of the belief in the product type as a good long-term investment. Some of that may be due to lack of confidence in the stock market or overall lack of options to make a return on capital. Although we are less than a year away from breaking into the longest economic expansion in U.S history, the fundamentals in the market point towards continued growth and success so long as a so called “Black Swan” event does not unravel it all.
- Adam Riddle and Austin Smith
Nexus Commercial Realty, LLC