Aloha Capital had another productive month of private lending in June. All Aloha loans are collateralized by single & multi-family residential real estate, first position liens and personal guarantees from sophisticated real estate investors. Since inception of the Fund, Aloha has originated over 580 loans.
In recent years, few residential real estate markets have been stronger than Denver’s. Since we office and live in metro Denver, we are intimately familiar with the area, and have witnessed first-hand the unprecedented, local growth and prosperity. The million-dollar question is: How long can the Denver boom continue? It’s easy to see why Denver, Colorado and environs is an attractive place to live: It has a mild, four season climate, top universities, a great job market and proximity to all kinds of Rocky Mountain recreation.
According to the U.S. census bureau, metro Denver’s population grew from 2,543,482 in 2010 to 2,888,227 in 2017, a gain of about 13.6%. Denver’s pace of growth mirrored Colorado’s as a whole, with the state’s population topping 5.6 million in mid-2017, growing 1.4 percent from 2016, for a total population of 5,607,154. Of course, all these people moving to Denver need a place to live, and the Denver residential market has soared. Since the 2009 market trough, the average median sales price of a single-family home in Denver has generally tripled. But could it be the growth is only in its early stages?
Colorado’s population is anticipated to reach 8.5 million by 2050, according to forecast numbers from the Colorado State Demography Office. That would be an increase of more than 50 percent from 2015. The lion’s share of that growth will be in the Denver metro area. The question is: Where are all the houses these people will live in? Denver continues to have an acute housing shortage.
Recently, the real estate markets with the lowest month’s supply of for sale inventory were San Francisco at 1.2, Salt Lake City at 1.3, and Boise and Denver, both tied with 1.4, according to Re/Max. A six-month supply of inventory indicates a balanced market between buyers and sellers. Another measure of housing demand is the number of days the average house is on the market before it sells. The metro areas with the fewest days on market were Seattle at 17, San Francisco at 20 and Denver at 21.
According to the latest data from Zillow, Denver saw a 15 percent drop in houses for sale inventory in May, the biggest decline in the nation. In response to the surging demand, developers have been busy: There are 83 completed or under-construction projects in Denver and more than $5 billion has been invested since 2013 in the downtown area alone, according to a recent report from the Downtown Denver Partnership. But the metro area’s population is simply growing faster than developers are building new homes.
A recent report from Shift Research Lab forecasts that the metro area will continue to see housing deficits through 2025, with overall vacancy rates around 1.5 percent during that time (5 percent is generally considered a “healthy” vacancy rate). Before long, Denver’s home deficit will reach 32,000 units, potentially putting upward pressure on home prices for many years. The report concludes: “…while all factors are having an effect, the overriding driver of the affordability challenge is the market: demand is outstripping supply.” The anticipated solution: build a lot more houses.
With demand for housing outstripping supply into the foreseeable future, it’s hard to imagine that dynamic being responsible for falling real estate prices in the Mile High City any time soon. Of course, economies are complex systems and other things can come into play. As we see in the table below, Denver actually still seems like a relatively affordable place to buy a residence, at least compared to many coastal cities. Comparing median home prices to median incomes shows that Denver is more affordable, for instance, than L.A., San Francisco, Seattle or Boston.
|Region Name||MKT SIZE RANK||2018-03 PRICE TO INCOME RATIO|
|Los Angeles-Long Beach-Anaheim, CA||2||9.29|
|San Francisco, CA||11||9.08|
|San Diego, CA||17||7.81|
|New York, NY||1||5.74|
|Miami-Fort Lauderdale, FL||8||5.06|
|Dallas-Fort Worth, TX||4||3.42|
|Minneapolis-St Paul, MN||16||3.35|
|St. Louis, MO||18||2.56|
Source: Zillow Still, investing in Denver means holding real estate in a booming market. Booming markets can be riskier than more stable, less rapidly increasing (or decreasing) real estate markets. We’ve written about the price-to-income ratio here in the past. We like this metric for keeping an eye on things, in the sense that the further housing prices move above the income of its residents, the riskier owning real estate could become. Large gaps between income and the cost of housing are not sustainable over the long term – prices tend to correct back to “normalcy”.
The firm Local Market Monitor puts Denver at the top of its list of U.S. real estate boom markets. It’s hard to argue. What might bring Denver’s boom to an end? Hard to say. In Texas in the 1980’s a sudden drop in oil prices caused a housing bust. Sub-prime mortgages imploded in 2008 causing booming housing prices to quickly give back many years of appreciation.
A sudden spike higher in interest rates, a political crisis, a war…something totally unexpected could spark the next correction. Aloha Fund had its best month for the year-to-date in June, above our targeted monthly return. The Fund has ample deal flow on the lending front, has been growing consistently, and is actively seeking new capital.
Please reach out with your questions and interest in working with Aloha Capital in this excellent, income-producing investment.
We greatly appreciate your patronage and trust.