A Strong Recovery in Spite of Labor Challenges

Published Expert Article
by Andrew Monette
Senior Advisor at Pinnacle Real Estate Advisors

Sixteen months ago, the world was turned upside down. What seemed to be an overnight change, suddenly transactions on a smooth path to closing terminated, lenders retracted loan commitments, landlords hunkered down waiting for any sign of light, and millions of people lost their jobs over a fairly short period of time. There are many aspects of life currently out of “norm”, but what really is the new “norm”?

With so many Coloradans currently out of work, it is contradictory in nature to also see records being broken (in a positive way) – and we are currently experiencing this in the Denver metro multifamily market. According to Cary Bruteig’s, Apartment Insights Q2 2021 report, this past quarter we saw new records simultaneously be set in terms of vacancy rate, absorption, rental rates, and sales pricing (per unit) for 50+ unit apartment communities. Using 2020 as the barometer for 2021 stats would not be an appropriate gauge of the market. With nearly every metric of market health fluctuating so much last year, one would obviously expect 2021 stats to be an improvement. However, what we are currently a party to, is shattering records from some of the best years of multifamily (2014 and 2015) in the Denver metro following the Great Recession. For example, the vacancy rate for stabilized properties throughout the metro dropped to 4.87% last quarter, which beat the record previously set in 2015. In 2014, the record for greatest increase in rental rate was set at $57, but this was shattered in Q2 2021 when there was a $93 increase in average rental rate. The effective rental rate in Q2 2021 sat at $1,606 which surpasses the previous record of $1,513 set during 2019.

Half-way through 2021, we are seeing a tremendous recovery in many real estate sectors, with arguably the most important being housing, yet there are still “help wanted” signs plastered all over Colorado, from the retailers in the CBD to the restaurants hosting guests in our mountain towns. We appear to be in some juxtaposed world of record-high rental rates paired with a labor shortage. The Colorado Department of Labor and Employment (CDLE) currently reports over 100,000 jobs listed on ConnectingColorado.com; an employment database aimed at helping Coloradans find new employment opportunities. What does not seem to add up is, how can the labor shortage be so severe it handcuffs restaurants from opening at full capacity but there are significant state and federal-level unemployment incentives still available? On the CDLE website there is information on the Colorado Jumpstart program which pays eligible Coloradans who return to work between May 30th and June 26th a $1,200 incentive bonus if they register for the program. According to the Small Business Administration, the small business filing rate in Colorado increased in 2020 – contrary to what many of us thought was happening. Improving 3.73% over 2019, there were a total of 653,639 small businesses registered in the State of Colorado in 2020. How is it possible to have such a high rate of unemployment it justifies stimulus payments be made to incentivize people to jump back into the workforce while also having small business filings at record numbers?

In addition to unemployment stimulus programs available there are also programs in-place to assist landlords who may be having rental income shortages related to tenants experiencing hardship. The two most well-known programs in Colorado are the Emergency Rental Assistance Program (ERAP) and the Property Owner Preservation (POP) program. According to the U.S. Treasury, the ERAP is a federal program established by the Consolidated Appropriations Act, 2021. At this time, tenants are the party responsible for registering for the program while the POP program (created at the state-level and was born from funds earmarked in House Bill 20-1410) places the responsibility on the landlord to register and maintain records. Both programs have been popular, and unbelievably valuable to many apartment investors throughout the Denver metro area.

There is a lot of speculation as to what the long-term effects of the trillions of stimulus dollars pumped into the system will have on our economy. We are currently experiencing record breaking rent levels, incredibly low vacancy, higher than usual unemployment, and stimulus money being thrown out left and right. These phrases generally would not go together in a cohesive sentence, but this is the market we are currently in. Historically low interest rates and ample, but stringent, lending have helped fuel the multifamily market to a level many of us thought was a full market cycle away. Local investors have always been bullish on Colorado, but more coastal investors have eyed our state and are chomping at the bit to acquire something along the Front Range. They ask, “how is the market in Colorado?” and the typical reply is, “the market is hotter than a goat’s butt in a pepper patch!”

Featured in CREJ’s August 2021 Multifamily Properties Quarterly