DENVER | Main Development Thread #6

[Robert.hampton]

Originally Posted by DownhomeDenver

Wait, what's the Capitol Mall? ** Never mind, found it. That Google is something else...**

And I think you meant to say Sassafras. I love that place!

Yes, Sassafras, thats the one!

Some more on the proposed capitol mall development (and other infill related projects a the capitol) can be found here https://www.colorado.gov/pacific/sites/default/files/5-Urban%20Design_2.pdf

The combination of the civic center renovation and capitol mall provides some excellent opportunity to enhance connectivity and pedestrian experience between the CBD and uptown. Will be an interesting one to watch.

[wong21fr]

Originally Posted by Robert.hampton

Denver Business Journal link here:http://www.bizjournals.com/denver/blog/r...to-get-315-apartment-topper-on-17th.html

It confirms the original building WILL be torn down.


Other Iinteresting tid bits include a new "unnamed New York City-based real estate investment firm." And "The Tavern will also have a rooftop patio with high-speed elevator access once the eight-story development is complete."

It does say this about the original building, "The existing Tavern building will be torn down and rebuilt as part of the redevelopment."

I wonder if that means that the facade will be preserved as part of the new building?

[TakeFive]

Originally Posted by wong21fr

It does say this about the original building, "The existing Tavern building will be torn down and rebuilt as part of the redevelopment."

I wonder if that means that the facade will be preserved as part of the new building?

Exactly what I wondered as well. Or at least incorporate certain elements?
In any case it does feel like more of a win-win and interesting proposition.

[TakeFive]

Reflect and Project (always a dicey proposition)

Economic Drivers
* The bloom is off the oil & gas exploration rose and next year could see another leg down.
* By the middle to end of next year, most of the billions on fastracks projects will be finished.
* By the middle to end of next year about 5,000 new apartments will be completed in central Denver. There will be more groundbreakings but not nearly at the same pace I'm guessing.

Rhythms of the Economy
Right now it seems as though (urban) construction is holding up the economy. It isn't the oil & gas industry along with those that feed into O&G exploration. Exports are slowing so the business of manufacturers is down. Airplane manufacturing would be an exception. The tech sector is still solid, for now.

With respect to Denver I don't see the new jobs being created like in other places. Denver's economy has become so doggone diverse that I'm sure a lot of organic growth is hard to see though.

The question is - and I'm looking out a year - with transit projects winding down, if we see less urban development and more negative impact from oil & gas where's the good paying jobs to support living in all those expensive new apartments going to come from?

Originally Posted by Stonemans_rowJ

I have a friend in construction management who works for Hunt. He's been on the DIA Westin for the past few years, and with that wrapping up, has been reassigned to the White lodging hotel. I would think its a go; he's just resigned his lease so Hunt must be confident its starting soon.

Thanks for the heads up.

[enjo13]

Originally Posted by TakeFive

The question is - and I'm looking out a year - with transit projects winding down, if we see less urban development and more negative impact from oil & gas where's the good paying jobs to support living in all those expensive new apartments going to come from?

I had a really interesting conversation with a property manager today who is involved with several new buildings Downtown. According to him their capital projections involve a 30% discount in rent over what they're charging today.

Interestingly these are the same numbers used to pitch investors. From their perspective they're just swimming in free money, which they know full well is going to stop at some point.

Point being: even at a 30% discount, developers still remain really bullish about Denver. Of course construction is going to slow, it has to.. but I don't think it's in any danger of drying up soon.

[TakeFive]

Originally Posted by enjo13

I had a really interesting conversation with a property manager today who is involved with several new buildings Downtown. According to him their capital projections involve a 30% discount in rent over what they're charging today.

Interestingly these are the same numbers used to pitch investors. From their perspective they're just swimming in free money, which they know full well is going to stop at some point.

Point being: even at a 30% discount, developers still remain really bullish about Denver. Of course construction is going to slow, it has to.. but I don't think it's in any danger of drying up soon.

Oh thanks, that's really good feedback. Nothing like being there on the ground.

So maybe 12 months from now today's $2.00 per SF rent might be closer to $1.50 or so with move-in incentives bringing it down even more.

I wouldn't doubt that so long as vacancy stays in say a 5-7% range that more units would likely be built, just at a slower more realistic pace. If vacancy were to go much higher than 7% that would be troublesome I'd think.

Trying to decipher economic drivers and the local economy a year out is speculative at best so we'll wait and see with that.

[mhays]

I suspect that's not what he meant.

One option might be that they could absorb that much of a drop while still remaining solvent with the property. In other words, their business plan is able to account for that kind of drop.

Another would be that they anticipate that sort of rent depreciation in relative terms (dollar adjusted) over a given period, as the buildings age. That's a calculation that developers and lenders do make, and the subject of a lot of research and projection.

It would take a HELL of an oversupply to make rents drop that much. It's hard to imagine particularly with Denver's diversified economy.

For example Las Vegas went through hell, and the first report I saw report showed only a 15.67% decline in rents from peak to trough. Of course that was in an environment that favored renting over buying...sound familiar?

[TakeFive]

Originally Posted by mhays

I suspect that's not what he meant.

One option might be that they could absorb that much of a drop while still remaining solvent with the property. In other words, their business plan is able to account for that kind of drop.

Another would be that they anticipate that sort of rent depreciation in relative terms (dollar adjusted) over a given period, as the buildings age. That's a calculation that developers and lenders do make, and the subject of a lot of research and projection.

It would take a HELL of an oversupply to make rents drop that much. It's hard to imagine particularly with Denver's diversified economy.

For example Las Vegas went through hell, and the first report I saw report showed only a 15.67% decline in rents from peak to trough. Of course that was in an environment that favored renting over buying...sound familiar?

Of course I'll not agree with the Oracle of Seattle.

Good grief, $800 for a nice 2 bdrm, 2 bath apartment. Dayum.
Anyhow, there's a number of reasons why I don't care for the Las Vegas comparison.

With respect to Denver, we could easily assert that rents are artificially high. A 25% premium is not unrealistic such that in a different market they could easily back up that much, especially with units where the newness has worn off. Even at a $1.50 per SF that's prolly double the rent in Las Vegas.

[bcp]

Originally Posted by mhays

I suspect that's not what he meant.

One option might be that they could absorb that much of a drop while still remaining solvent with the property. In other words, their business plan is able to account for that kind of drop.

Another would be that they anticipate that sort of rent depreciation in relative terms (dollar adjusted) over a given period, as the buildings age. That's a calculation that developers and lenders do make, and the subject of a lot of research and projection.

It would take a HELL of an oversupply to make rents drop that much. It's hard to imagine particularly with Denver's diversified economy.

For example Las Vegas went through hell, and the first report I saw report showed only a 15.67% decline in rents from peak to trough. Of course that was in an environment that favored renting over buying...sound familiar?

100% correct...this is just stress testing and smart, conservative disclosures to investors to show that the pro forma can absorb a catastrophic reset. Nobody is going to roll back rents beyond what the market dictates...1-5% changes happen....double digits downward is only for the catastrophe era...rent is like taxes, once they are up they are permanent with only occasional reductions.

[bunt_q]

Originally Posted by mhays

I suspect that's not what he meant.

One option might be that they could absorb that much of a drop while still remaining solvent with the property. In other words, their business plan is able to account for that kind of drop.

Another would be that they anticipate that sort of rent depreciation in relative terms (dollar adjusted) over a given period, as the buildings age. That's a calculation that developers and lenders do make, and the subject of a lot of research and projection.

It would take a HELL of an oversupply to make rents drop that much. It's hard to imagine particularly with Denver's diversified economy.

For example Las Vegas went through hell, and the first report I saw report showed only a 15.67% decline in rents from peak to trough. Of course that was in an environment that favored renting over buying...sound familiar?

I think that's exactly what he meant. I've heard almost the exact same thing - rents are 30% or so higher than the rent they'd need to "make the project work" - which means 30% gravy, after the amount of markup they'd need to satisfy themselves and their investors. There are no downward forces - they can rent quickly and easily at those prices, and supply is constrained, so there's no force that would encourage one developer to reduce prices to get a competitive advantage, it's just not necessary. In that sense, the market is somewhat broken. But given that everybody is saying the same thing, I'd have no problem cutting into that 5% to get mandatory design review.

Agree though that we'll never see a drop of 15%, at least not market wide. But if we saw it in older buildings with fewer amenities, that'd be a start. (Not that we'll have any older buildings left in 10 years .)

What would really make my day would be if evidence of collusion and price fixing was discovered between some of the larger apartment developers. Seems like an area that would be ripe for bringing down the antitrust hammer of god. Just my personal opinion...

[mojiferous]

Originally Posted by bunt_q

What would really make my day would be if evidence of collusion and price fixing was discovered between some of the larger apartment developers. Seems like an area that would be ripe for bringing down the antitrust hammer of god. Just my personal opinion...

It's actually Big Data and not collusion that is fixing the prices for most of the apartment companies now, which without getting too far into it is actually much worse and far harder to fix than collusion or anti-competitive practices. Kind of like the automated trading algorithms of Wall Street, they set rent prices based on market averages for similar properties. And just like Wall Street algorithms, there are probably feedback loops hiding in dark corners of the code. This is why prices are always at weird price points and why prices on some floor plans are unavailable - it's all (presumably) based on availability, when certain floor plans are coming to market, and the prices for other apartments in the same market of similar size and amenities. The algorithm will reduce prices if there is a glut of a product and raise them if there seems to be high demand.

They all build in a certain amount of wiggle room but because of the way the math works prices for the major apartment companies end up being at the very top end of what people will pay, maybe even a little higher.

It's all very new, very unregulated, and (in my opinion) at least part of the cause of high rents.

[mhays]

Despite that 30% number, if rents dropped even a little relative to costs, that would probably slow construction substantially. The investment has to make sense compared to other investments, whether that's another city where the cost/risk/rent equation is a little better, or the stock market.

Things are right on the edge in my market, which is also busy. Lots of concept analysis for projects that never go beyond that stage, or even going most of the way through design and entitlements for projects that may or may not pencil, depending on whether the team can squeeze out another few bucks per square foot. It's the natural order of things, and has been for the three up-cycles during my involvement.

[bunt_q]

Originally Posted by mhays

Despite that 30% number, if rents dropped even a little relative to costs, that would probably slow construction substantially.

Lots of concept analysis for projects that never go beyond that stage, or even going most of the way through design and entitlements for projects that may or may not pencil, depending on whether the team can squeeze out another few bucks per square foot. It's the natural order of things, and has been for the three up-cycles during my involvement.

I have a hard time believing that, and would be willing to take that chance. I think there are enough constraints affecting our ability to deliver enough units to meet demand in a timely fashion, that we'd get exactly the same number of units constructed if costs went up 5%. And I'd be willing to chance that those units would be delivered at exactly the same rents - or at least, no more of an increase than the 15% we're already seeing on an annual basis.

I just don't think raw development costs are the main constraint right now on new project delivery right now. It is very easy for 15,000 people to move here in the next 12 months, and they will. There is nothing at all that the development industry can do in response to that in the same timeframe, unless they happened to have started two or three years earlier. There is not that stock of ready, acquired, and entitled properties sitting around in central Denver anymore. (There also is not that supply of finished lots in the suburbs anymore.) So, if we're a few years behind already, and pure demand is driving costs up 15% per year, there is little downside, as I see it, in eating into that by 5% when we do get around to catching up, to get some of the things the public wants and needs. Because raw costs are not increasing at the same rate, rents are sticky, and a temporary shortage is just creating gravy for developers as they catch up. (Land prices are not increasing at the same rate, because land is not the constraint either - finished housing units are the constraint.)

Alternatively, we could just shut down the community planning and development and building departments for a few years. 24 months - build whatever you want, wherever you want, however you want, no fees, no permits. That would be a fun experiment. And I bet both rents would drop and development would pick up its pace. But that's not realistic.

[mhays]

We'll have to disagree on that one.

A lot of factors go into any project, and a lot of factors go into any specific market and time. But on average, apartment development markets should respond to every 0.1% price difference (relative to projected rents) much like cigarette sales do to every penny difference in tax rates, which is apparently easy to track and quite predictable.

A 15% rise is about scarcity, not costs. The exception might be land costs, which I assume are rising quickly in key areas. Construction escalation has been more like 4-5% at least where I live. Unless things get tighter, I bet rent increases ease substantially.

[seventwenty]

There's an article in today's DBJ that dovetails nicely into this very insightful discussion:

Http://www.bizjournals.com/denver/news/2015/07/16/denver-in-top-10-in-u-s-apartment-growth.html

Denver issued 7,840 apartment permits in the 12 months trailing May. New York led the nation with 44,333 permits issued.

The number of apartment permits increased nearly 10 percent in Denver from May 2014 to May 2015.

[bunt_q]

Originally Posted by mhays

A 15% rise is about scarcity, not costs. The exception might be land costs, which I assume are rising quickly in key areas. Construction escalation has been more like 4-5% at least where I live. Unless things get tighter, I bet rent increases ease substantially.

That's my point, the 15% is about scarcity, not costs. But why should developer reap all of that 15% premium in projected rents - it's not as though they'll be able to respond to that scarcity in the short term, and once they do, prices will not go back down. So if costs are rising at 4-5%, but projected rents are rising at 15%, why shouldn't the public sector be able to siphon off the delta without having any impact on what is ultimately delivered?

[bcp]

um...because typically developers own the risk and the debt? we live in a free market capitalist country? "siphoning off profits"? that's kinda scary...again, if everybody wants price and profit controls, will there be protections during bad times from the same beneficiaries?

[bcp]

Originally Posted by mojiferous

It's actually Big Data and not collusion that is fixing the prices for most of the apartment companies now, which without getting too far into it is actually much worse and far harder to fix than collusion or anti-competitive practices. Kind of like the automated trading algorithms of Wall Street, they set rent prices based on market averages for similar properties. And just like Wall Street algorithms, there are probably feedback loops hiding in dark corners of the code. This is why prices are always at weird price points and why prices on some floor plans are unavailable - it's all (presumably) based on availability, when certain floor plans are coming to market, and the prices for other apartments in the same market of similar size and amenities. The algorithm will reduce prices if there is a glut of a product and raise them if there seems to be high demand.

They all build in a certain amount of wiggle room but because of the way the math works prices for the major apartment companies end up being at the very top end of what people will pay, maybe even a little higher.

It's all very new, very unregulated, and (in my opinion) at least part of the cause of high rents.

This is the funniest post in YEARS! Better supply and demand equations driven by actual market data, rather than a "whim", is the new evil? You sir have provided a good laugh today!

[enjo13]

Originally Posted by bunt_q

I think that's exactly what he meant.

It's for sure what he meant. The broader context of the conversation is that my company is moving into commercial vendor management and we're out having conversations with a number of property managers to help us understand the market from their perspective. While we spent most of the discussion on things like COI's, the broader business context they're operating in was definitely informative.

I do think it's important to note: this is a high level property management executive, not a developer. While he's involved very early on in these projects, he's not actually making money decisions so his observation may be a bit skewed. I do think it's a really interesting data point however.

Particularly as we've been having similar conversations in Los Angeles, San Francisco, and Chicago. In SF they're having a lot of trouble establishing what exactly reality is these days. They're building as quickly as possible and continuing to fall further behind.

However in both Los Angeles and Chicago things seemed to be quite a bit more muted in terms of exuberance. Those PM's are far less bullish than they are in Denver. Which is sort of interesting in and of itself as well.

[Brainpathology]

This is a really, REALLY scary conversation. I hope to retire to Denver when I'm finished here in FL. But where is Denver going to be when the people who live there (including a bunch of people on this board now for some reason) turn it into MechaBoulder?

San Diego? Austin? Portland (maybe just as bad as Boulder really). Chicago? I guess.... I'll just have to follow the travels of former residents here wherever they are fleeing to and see what they find.

I want a liberal city (in that there is a good safety net, culture, tolerance, diversity, transit, density, etc) but not all those things PLUS every single person and business who does the work of building our city is evil and must be fought tooth and nail.