Denver Housing Market Remains Red Hot as In-Migration Continues

As was recently reported in the Denver Business Journal, a new report out from Zillow ranks Denver as the nation’s 7th hottest housing market in 2018. According to Zillow senior economist Aaron Terrazas, “The tech industry continues to roar, attracting thousands of new residents per year to tech-dominant markets like Seattle, Denver and the Bay Area.”

Indeed, recent reports from both United Van Lines and U-Haul place Colorado near the top of the list of states receiving new residents. As Mike Blau, a regional president at U-Haul explained, the impacts of this in-migration are readily apparent. “You used to drive down the Interstate 25 corridor and see open spaces everywhere. Now you hardly pass a dirt lot. There are no gaps. Colorado is bursting at the seams. Denver is overflowing so much that folks are moving to the outskirts.”

Oil Appears Poised to Continue Upward Trajectory

A recent article on the Wall Street Journal’s Moneybeat blog cited several factors that are contributing to an increasingly bullish outlook for oil prices. Having gained 22% in the past 12 months, U.S. crude oil futures are set to benefit from demand growth that could well exceed supply increases. Given the geopolitical risks looming in important oil-producing nations like Iran, Iraq, Libya and Venezuela, “global oil supply disruptions could materially increase in 2018” according to a Citigroup analysis.

Single Family Home Rental Market Lures Institutional Investors

A recent Wall Street Journal article examined the increased participation of large investment firms in the single family home rental market. Starting with the 2008 financial crisis, when mounting foreclosures presented an attractive investment opportunity for many institutional investors, large firms have moved aggressively to acquire single family homes in cities throughout the nation. With deep pockets, institutional investors are well positioned to renovate the homes they acquire before putting them on the rental market. As the article notes, “The buying spree amounts to a huge bet that the homeownership rate, which currently is hovering around a five-decade low, will stay low and that rents will continue to rise.”

To some extent, the bet may become a self fulfilling prophecy, as investment firms soak up the scarce inventory available in desirable markets, driving up housing prices while adding to their increasingly valuable rental inventory. American Homes—which owns more than 48,000 houses nationwide—recently reported that the average household income of their rental applicants had risen to $91,000, highlighting the fact that rentership is now common among young professionals and growing families.

At Granite Capital Group, this article comes not as news, but rather as another confirmation of a trend that we have long recognized. For all three of the projects that we have pursued since forming the firm 18 months ago, the market dynamics described above are aligned to increase both property valuation and rental income over the term of our investment. As we evaluate future projects and our current portfolio, we look ahead to the end of this cycle and the beginning of the next, when the millennials—with their famously delayed household formation—finally start buying homes in larger numbers. This demand may well serve to drive prices of entry-level homes even higher, creating high demand for the properties in our portfolio.

Granite Capital Group Acquires 105-Unit Townhome/Apartment Complex in Fort Collins, Colorado

Fort Collins, CO—Granite Capital Group (GCG), a Santa Barbara, Calif. real estate investment firm with multiple Colorado real estate holdings, has purchased the 105-unit Brooklyn Park Rowhouses, a townhome/apartment complex in Fort Collins, Colorado. The sales price was $27.8 million. The transaction closed June 23.

Located at 2758 Iowa Drive, the property consists of 12, Class A buildings that were built in 2007 and 2008. It is situated on 4.4 manicured acres and features a mix of 2 and 3 bedroom units with 2 or 3 baths, attached full-sized 2-car garages, private patios, gas fireplaces, walk-in closets, in-unit laundry rooms, 9’ ceilings and oak floors. The units range in size from 1,120 to 1,407 square feet.

The property will be rebranded Rigden Farms Townhomes and managed by Granite Management Group. It is currently 100 percent occupied.

“Our goal in all our projects is to build and operate housing that feels like a home rather than apartment living,” says Bruce Savett, GCG founder and principal. The company plans to upgrade the unit interiors as units become available. Upgrades include quartz countertops, refinished hardwood floors, new lighting and plumbing fixtures and new kitchen cabinets.

“Fort Collins is a wonderful community to raise a family, pursue an exciting career or to retire,” says Savett. “Its economy is strong, diverse and attracts professionals from around the country. We see Rigden Farms as being in a prime location adjacent to a King Soopers-anchored retail center and a short distance to the downtown area so shopping and restaurants are within easy walking distance.”

Projected annual cash flow for investors will start at over 6 percent in year one, increasing to over 10 percent in year four.

Jacob Steele and Nick Steele of Marcus and Millichap in Denver represented the buyers in the transaction. A Fannie Mae loan was acquired through Brian Huff and Chris Ellis at Berkadia Commercial Mortgage.

Rigden Farms is the latest in a number of GCG acquisitions in Colorado. In 2016, GCG purchased the recently completed Kipling Commons, a 48-unit residential development in Arvada for $10.6 million, and it closed initial funding and began developing Fairways at Vista Ridge, a $41.5 million, 14.5-acre, 169-unit single-family rental community in Erie’s Vista Ridge Master Planned community.

Enclave Vista Ridge — Erie, Colorado

Currently under development in Erie, Colorado, Enclave Vista Ridge is a great example of the investment opportunities that Granite Capital Group sponsors. A commuter community for both Denver and Boulder, Erie offers a high quality of life and lower cost than either of those cities and, for that reason, has been drawing many new residents in recent years. Adding new, high quality units to the constrained housing supply in the area, Enclave Vista Ridge will be uniquely attractive to prospective residents. With its low density layout, life at Enclave Vista Ridge provides a similar experience to living in a single family home, without the long-term financial obligations that would normally entail.

Split between single family, detached Fairway Homes and multi-unit Park Homes, Enclave is positioned to offer appealing options to a wide variety of tenants. All units feature Class A finishes and attached, direct-access garages. Access to a huge range of amenities in the Vista Ridge master-planned community is another strong selling point. Enclave Vista Ridge will be managed by Granite Management Group, an affiliate of GCG. Because of this close relationship, marketing efforts for the property are underway already, so that units can be leased as soon as they come online. More information on Enclave Vista Ridge can be found in the initial marketing materials here.

Shale 2.0 Reshapes Global Energy Dynamics

When oil prices cratered in 2014, much of the blame was attributed to the dramatic increase in US energy production that was made possible by fracking and other technologies. The situation was exacerbated, everyone agreed, by Saudi Arabia’s decisions to increase their own production at the same time. Traditionally, Saudi production costs have been among the lowest in the world, so it was reasonable for them to assume they could weather the downturn better than their competitors.

It is clear today, however, that things did not play out quite as the Saudis expected. With oil prices now relatively stable, US producers are benefitting from further improvements in technology and a nimble business model that allows them to quickly adapt to market changes. According to a recent Wall Street Journal article, “The productivity—output per shale drilling rig—has been rising by more than 20% a year. That means every 3½ years the average rig produces twice as much oil or gas.” While many of the small and mid-size firms that account for the majority of domestic production did not survive the downturn, those that did are lean, efficient and starting to look to software—which they have used sparingly, to date—to make their businesses even more competitive. In short, many signs point to a future in which US energy production continues to increase significantly. You can read the WSJ article here.

Paltry Inventory Stymies Would-Be Homeowners

The Washington Post recently examined the climate for first time home buyers and found that even more barriers exist to ownership than are commonly considered. Principally, the article looked at the lack of homes for sale and how that impacts those trying to enter the market. “The houses go so quickly” laments Teree Warren, a 31 year-old who is trying to buy a home in the Dallas area. Adding to delayed household formation, staggering student debt and slow wage growth, tight housing inventory is just one more reason that the lower homeownership rates we have seen in recent years may well persist for some time to come. Click here to read the article.

Housing Affordability Drops to 2010 Levels

Two new reports about the U.S. housing market show that higher mortgage rates, increasing home prices and tepid wage growth are all conspiring to keep home ownership out of reach for many middle-income Americans. The December 2016 Mortgage Monitor report from Black Knight Financial Services shows that housing affordability is currently at the lowest levels since 2010—a median wage earner would have to devote 22.2% of their income to make payments on a median priced home. With data from CoreLogic indicating that housing prices will continue higher, the trend seems likely to continue. As the firm’s chief economist told CNBC, “We expect our national index to rise 4.7 percent during 2017, which would put homes prices at a new nominal peak before the end of this year.”

OPEC Cut Brightens Prospects for U.S. Energy Producers

For the first time in 8 years, OPEC members have voted to reduce their collective output by 1.2 million barrels per day. The cut amounts to an approximately 3.5% reduction in OPEC production and, combined with reductions in Russian output, will be sufficient to trim total global oil production by about 1%. The immediate reaction in energy markets, with prices surging upward, no doubt gives OPEC renewed hopes of relevance in a global energy market that has seen several non-OPEC members emerge as key producers.

First on that list, of course, is the United States, where improved production techniques have led to a dramatic increase in output of both oil and natural gas in recent years. Having weathered the slump in energy prices, the producers left in the market today are in a strong position to compete globally. According to Rystad Energy, “The breakeven cost per barrel, on average, to produce Bakken shale at the wellhead has fallen to $29.44 in 2016 from $59.03 in 2014”, a remarkable move in such a short time span. While it may take up to a year for conditions on the ground to improve for U.S. producers, the cuts from OPEC and Russia are clearly good news for places like North Dakota and Texas, which can expect to see increased activity going forward.

Fiscal Implications of Trump Presidency Remain Unclear

As the shock of the Trump election wears off, markets and policy makers are turning their attention to the future and trying to determine what policies a Trump administration is likely to pursue. One thing that has garnered much attention is Trump’s intention to dramatically increase infrastructure spending. While this is the sort of investment that generally attracts support from across the political spectrum, coupling such spending with Trump’s proposed tax cuts is making fiscal conservatives nervous about the potential for an exploding deficit. With yields on the 10 Year Treasury up almost 30% since the election, there can be little doubt that market participants throughout the world are watching carefully and will demand an increased yield if we appear poised for an era of debt fueled spending.