All Forum Posts by: Tom De Napoli

@Marcus Auerbach

When we decided to focus on syndicating deals in Denver multifamily 5+ years ago, we were attracted to the diverse economy, strong job market and income growth which were all contributing to population growth that was outpacing the national average. I looked back at our original investor proposal to pull some of the macro trends that we were following to give you a sense of what drove our thinking at the time and which ended up paying off for our investors.  Perhaps you can apply them as a framework to regions your are studying in Wisconsin and beyond

• From 2005 to 2015, population increased in Metro Denver by almost 500,000 people or 18%, from 2,582,000 to 3,054,000.
• As of Oct 2015, Denver had an unemployment rate of just 3.1%, lower than Austin at 3.3%, or Washington DC at 4.3%
• At 2.4% population growth, Denver was the second fastest growing large city in the U.S., trailing only Austin, Texas (period July 1, 2013 – July 1, 2014).
• Job Growth in 2014 was over 34k jobs, a 2.5% increase; outpacing Austin in overall growth, but trailing it’s rate of 3.5%. Job Growth since the bottom of the recession was 16.1%, 10th out of the 100 largest metros.
• Per Capita Personal Income: Denver $58K vs. U.S. $32K
• Median Household Income: Denver $79K vs. U.S.$61K

We also liked that Denver offered many of the high quality jobs and amenities -restaurants, nightlife entertainment - that made cities like San Francisco, Los Angeles, New York, Seattle, Austin attractive destinations in recent years, combined with the lifestyle benefits that come from living close to amazing, year-round outdoor activities.

• Ranked 5 of 62 for best large city economies (Source: Wallet Hub)
• Ranked 8 of 100 best cities for an active lifestyle (Source: Wallet Hub)
• Colorado is ranked #2 in the country as most attractive states for employment and #1 for job opportunities (Denver Business Journal)
• Ranked 12 of 62 for best large cities to live (Source: Wallet Hub)
  

However, the leading indicator that informed our thesis was Denver’s growing concentration of college-educated millennials, which is a proven catalyst of regional economic growth. Employers are attracted to cities offering a young, educated, tech savvy workforce. These high-wage jobs stimulate growth for surrounding metro areas and lower- income residents which mattered to us because we were investing in workforce housing outside of the downturn, urban core.

• At 12.8% growth, Denver had the 3rd fastest growing population of young adults (18-34) in the country between 2010-2015 -- over 8 points above the national average(Brookings)
  The number of college-educated 25-34-year-olds in Denver increased from 163,000 in 2000 to 240,000 in 2012, a 46.6% increase (source: The Young and Restless and the Nation’s Cities).
• Out of the 51 largest metros studied, this percentage increase trailed only Houston, San Antonio, Oklahoma City, Nashville, Salt Lake Vity, and Las Vegas over the same period.
• Out of the top 15 metros with the largest populations of college-educated 25-34-year-olds,
• Denver’s growth rate was second behind only Houston at 49.8% — 17.5% above the national average
• With 240,000 college-educated 25-34-year-olds, Denver ranks 11th out of the top 51 largest Metros for total population.
• Denver has 4 of the top 20 zip codes with the Highest Increase in Millennial Populations in the US (source: Rent Cafe)

I hope this helps shed some light on the impressive growth that Denver, and cities with similar fundamentals, have experienced in recent years.

@Ken Hart My partner and I own and operate multifamily buildings in metro Denver from out-of-state.  We are able to do this by having a reliable local team in place which includes a property manager, RE broker, mortgage broker and contractors.  Once we developed the foothold in the market, we were able to build strong local relationships, which improves deal flow.  This takes time, patience and time spent on-the-ground and in-person to meet people face-to-face, walk/drive the markets and test your assumptions of certain fundamentals.  

Unfortunately, we are late in the cycle and the multifamily property types you're pursuing (not just in Denver but in other desirable markets and undesirable ones too) have lots of competition for buyers, often unsavvy ones who are not carefully underwriting their deals and as a result driving up the price per door or family offices/UHNWIs with patient money that can afford to buy at lower short term yields than you or your investors may be willing to tolerate.

As investors, we all must proceed cautiously at such elevated pricing:

• Investment performance relies on strong rent growth and continued low cap rates at refinance or sale.
• Demand has pushed prices for riskier properties with less upside to unsustainably high levels. 
• Many secondary and tertiary markets with recent rapid growth have questionable fundamentals and are becoming overheated

Not all job and population growth is created equal.  A city or submarket that is growing fast on paper, may not be creating diverse or high paying jobs that are needed to help the region to endure the next drop in the economic cycle, or even a disruption to a specific industry sector.  A region's population and job growth is a great initial indicator to look at as a first step, but then you need to drill down deeper by examining other local variables such as HHIs, GMPs, diversity of economy and other factors that will provide perspective on the vitality of the area's economy.  

For example, the bottom 10 metros for GMP/capita (measurement of a metro area's output based on national prices for the goods and services) of the largest 53 metro areas in the US, include a few Rustbelt cities, but surprisingly the list over indexes in superstar growth metros in the Sunbelt.  So, while many of these cities have impressive job and population growth on paper, the local economies are more fragile than they appear on the surface, which is a risk you'd need to factor into your underwriting both in terms of rent loss and loss of asset value during a downturn.  It's smart to look for growth, but you need to make sure that growth is sustainable over time.

Bottom 10 Metros for GMP/capita (lowest first)

1. Riverside, CA
2. Tucson, AZ
3. Tampa - St. Petersburg, FL
4. Las Vegas
5. Jacksonville, FL
6. Providence, RI
7. Phoenix, AZ
8. Buffalo, NY
9. Rochester, NY
10. Orlando, NY

@Robert Ellis - Oftentimes buildings are zoned with ground floor retail to stimulate the growth of walkable "downtown" areas.  As you explore these types of deals, part of your due diligence should be to research the local building departments to ensure the time and costs associated with re-zoning and re-entitiling the property are properly factored into your underwriting.  

I'd also caution you that office doesn't necessarily thrive everywhere.  Similar to certain segments of retail, not all office space is created equal and can therefore be vulnerable to digital disruption.  Service based retail that is hard to replicate online, such as convenience stores, restaurants, QSR, grocery, wireless stores, dry cleaners, medical offices, hair and nail salons, etc can generate strong risk-adjusted yield compared to apartments.

@Rob Moran - Sure, here’s  the link.  

Thank you.  We believe neighborhood retail centers are a property type that is well-positioned to provide sustainable growth to
investors precisely because it is comprised of stores and services that:

• 
  Are hard to replicate online: convenience stores, restaurants, QSR, grocery, wireless, financial services, dry cleaners, medical offices, fitness, hair and nail salons, etc. — and also provide opportunity to attract NNN national credit tenants

• Are complementary to ecommerce as a brick-and-mortar interface for
  last-mile delivery.

• Provide nearby residents a compelling experiential reason to leave their homes, such as in-person shopping by choice or visiting local restaurants

Like anything else in real estate, this can vary depending on the location and economic fundamentals of the surrounding area