Q&A with Teo Nicolais, a housing provider and instructor at Harvard Extension School

Nicolais talks rent and housing prices and Lakewood's growth cap

Posted 8/5/19

On July 25, the Apartment Association of Metro Denver hosted its annual Summer Economic Conference with a focus on future trends in the housing industry. The association, which represents and …

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Q&A with Teo Nicolais, a housing provider and instructor at Harvard Extension School

Nicolais talks rent and housing prices and Lakewood's growth cap

Posted

On July 25, the Apartment Association of Metro Denver hosted its annual Summer Economic Conference with a focus on future trends in the housing industry. The association, which represents and supports more than 336,000 apartment homes in Denver, also discussed the overall health of the housing industry at the conference.

Among the speakers at the conference was Teo Nicolais, who is the president of the real estate investment company Nicolais, LLC and is an instructor at Harvard Extension School where he teaches real estate courses. He was born and raised in Lakewood and attended Devinny Elementary, Jefferson County Open School, Dunstan Middle School and Green Mountain High School.

Nicolais took questions from the Lakewood Sentinel about rent, Lakewood's recent growth cap vote and the housing market in the Denver metro area.

This interview has been edited for brevity. For a more complete text, go to LakewoodSentinel.com.

What has average rent growth looked like over the past year?

The Lakewood apartment market really consists of two separate markets: north of Alameda and south of Alameda. 

Rents in Lakewood north have been essentially flat over the past year.  The average monthly rents in Lakewood north of $1,344 are up only $11 or 0.8% from where they were a year ago.  That's significant because inflation, which refers to the increase in the cost of all goods and services, was 2.7% over the last year. 

Put another way, if average rents in Lakewood north had increased the same rate as all other goods and services, we would have expected to see rents at $1,369.  Instead, average rents are lower at $1,344.

So, relative to the costs of all other goods and services, rents in north Lakewood are actually more affordable now than they were a year ago.

Average monthly rents in Lakewood, south of Alameda, increased by $51 or about 3.4% over the past year to $1,554.  Accounting for inflation, that means rents went up about 0.7%.

Rents can vary greatly depending on the unit type as well.  At $898 per month, Lakewood north has the third lowest average rent for studio apartments in the metro area. The average rent for a studio in Golden is 38% higher at $1,240. 

Lakewood recently passed a growth cap that will limit new home construction to one percent per year and require Lakewood City Council to directly approve projects with 40 units or more. How do you see this impacting affordable housing in the city?

The limit on new home construction will almost certainly make housing in Lakewood less affordable. 

The comparison between Lakewood and its neighbor Golden speaks volumes about how new home construction caps make housing less affordable.  Golden has had a 1% cap on new home construction in place since 1995. 

To most outsiders, Golden and Lakewood have very similar characteristics in terms of employment base, schools and shopping. In 2006, prior to the great recession and the ensuing economic recovery, the difference in average rents between Lakewood South and Golden was just $6. Today, that gap has widened to $159.  

The Lakewood North submarket, which shares its western border with Golden, saw the spread between its average rents and Golden's more than triple from $116 in 2006 to $370 today.

New home construction caps don't resolve the underlying problem of affordability, to the contrary they exacerbate it. 

That's because new home construction caps don't limit the number of people being born, turning eighteen, or moving to the state. Instead, they only limit the number of homes over which everyone in the housing market must compete.

Consequently, I think the cap on new home construction is likely to make housing less affordable in Lakewood. 

There's another dimension to the policy worth noting: the policy appears to place a disproportionate strain on low income families. 

The additional requirement that any apartment building with more than 40 units obtain a vote by the full City Council significantly hinders the development of apartments. The likely result will be a shift away from apartment construction and towards the easier and, on a per unit basis more profitable, construction of single-family homes.

What does the housing market in Denver look like?

The housing market in Denver is characterized as a footrace between unprecedented new supply and unprecedented new demand. During the first half of this decade, not nearly enough new housing was being developed to accommodate the growing population. 

In 2010, only 498 new apartments were built in the entire metro area, we're now building that same amount every two weeks. Across the Denver Metro Area about 34 new apartments are being delivered every day and all that new supply is having exactly the impact economists would predict. 

Whereas average rents were increasing at a double-digit level earlier in the decade, average rents grow by just 2.4% over the last year which is less than inflation.

Average rents in Denver are currently at $1,520. Lakewood south's average rents of $1,554 are about $34 higher than the Denver Metro. The Lakewood north submarket's average rents of $1,344 are $176 lower than the Denver Metro Area.

In terms of affordability ranking, Lakewood south is near the middle of the back ranking 23rd most affordable (or 15th most expensive) out of 37 submarkets monitored.

On July 25, the Apartment Association of Metro Denver hosted its annual Summer Economic Conference with a focus on future trends in the housing industry. The association, which represents and supports more than 336,000 apartment homes in Denver, also discussed the overall health of the housing industry at the conference.

Among the speakers at the conference was Teo Nicolais, who is the president of the real estate investment company Nicolais, LLC and is an instructor at Harvard Extension School where he teaches real estate courses. He was born and raised in Lakewood and attended Devinny Elementary, Jefferson County Open School, Dunstan Middle School and Green Mountain High School.

Nicolais took questions from the Lakewood Sentinel about rent, Lakewood's recent growth cap vote and the housing market in the Denver metro area.

What has average rent growth looked like over the past year?

The Lakewood apartment market really consists of two separate markets: north of Alameda and south of Alameda. 

Rents in Lakewood north have been essentially flat over the past year.  The average monthly rents in Lakewood north of $1,344 are up only $11 or 0.8% from where they were a year ago.  That's significant because inflation, which refers to the increase in the cost of all goods and services, was 2.7% over the last year. 

Put another way, if average rents in Lakewood north had increased the same rate as all other goods and services, we would have expected to see rents at $1,369.  Instead, average rents are lower at $1,344.

So, relative to the costs of all other goods and services, rents in north Lakewood are actually more affordable now than they were a year ago.

Average monthly rents in Lakewood, south of Alameda, increased by $51 or about 3.4% over the past year to $1,554.  Accounting for inflation, that means rents went up about 0.7%.

Rents can vary greatly depending on the unit type as well.  At $898 per month, Lakewood north has the third lowest average rent for studio apartments in the metro area. The average rent for a studio in Golden is 38% higher at $1,240. 

Age of property also makes a difference.  The average rents for properties built between 2000 and 2009 in Lakewood South were $1,722 where was the average rents apartments build in the 1960's was $1,003 - that's a 42% discount for older buildings.

Lakewood recently passed a growth cap that will limit new home construction to one percent per year and require Lakewood City Council to directly approve projects with 40 units or more. How do you see this impacting affordable housing in the city?

The limit on new home construction will almost certainly make housing in Lakewood less affordable. 

The comparison between Lakewood and its neighbor Golden speaks volumes about how new home construction caps make housing less affordable.  Golden has had a 1% cap on new home construction in place since 1995. 

To most outsiders, Golden and Lakewood have very similar characteristics in terms of employment base, schools and shopping. In 2006, prior to the great recession and the ensuing economic recovery, the difference in average rents between Lakewood South and Golden was just $6. Today, that gap has widened to $159.  

The Lakewood North submarket, which shares its western border with Golden, saw the spread between its average rents and Golden's more than triple from $116 in 2006 to $370 today.

New home construction caps don't resolve the underlying problem of affordability, to the contrary they exacerbate it. 

That's because new home construction caps don't limit the number of people being born, turning eighteen, or moving to the state. Instead, they only limit the number of homes over which everyone in the housing market must compete.

Consequently, I think the cap on new home construction is likely to make housing less affordable in Lakewood. 

There's another dimension to the policy worth noting: the policy appears to place a disproportionate strain on low income families. 

The additional requirement that any apartment building with more than 40 units obtain a vote by the full City Council significantly hinders the development of apartments. The likely result will be a shift away from apartment construction and towards the easier and, on a per unit basis more profitable, construction of single-family homes.

Apartments are a major source of affordable housing for low income families who are trying to gain a foothold on the ladder of economic prosperity. By shifting the limited number of new homes away from affordable housing units, the policy will likely mean more low-income families will be competing for fewer apartments and therefore driving those rents up.

Finally, it's worth mentioning the West Rail Line. Taxpayers spent $707 million building the 12.1-mile line connecting Golden, Lakewood, and Denver. One of the main promises of mass transit investment is the opportunity to build transit-oriented development around the stations. 

Transit-oriented development typically includes affordable housing and makes it possible for low income families to access jobs which would otherwise be beyond their reach for lack of transit. Transit-oriented development is also good for the environment.

Unfortunately, seven out of the 11 new stations built along the West Rail Line are now in cities which have opted to limit new home construction; in Lakewood's case, to limit construction of the very property type — apartments — which are the best fit for transit-oriented developments.

This means Lakewood is missing an opportunity to leverage the $707 million investment for the community and, by failing to develop around the stations, to deprive the entire system of riders which go toward paying the whole system.

What does the housing market in Denver look like?

The housing market in Denver is characterized as a footrace between unprecedented new supply and unprecedented new demand. During the first half of this decade, not nearly enough new housing was being developed to accommodate the growing population. 

In 2010, only 498 new apartments were built in the entire metro area, we're now building that same amount every two weeks. Across the Denver Metro Area about 34 new apartments are being delivered every day and all that new supply is having exactly the impact economists would predict. 

Whereas average rents were increasing at a double-digit level earlier in the decade, average rents grow by just 2.4% over the last year which is less than inflation.

Average rents in Denver are currently at $1,520. Lakewood south's average rents of $1,554 are about $34 higher than the Denver Metro. The Lakewood north submarket's average rents of $1,344 are $176 lower than the Denver Metro Area.

Of the 37 submarkets covered by the Denver Metro Area Apartment Vacancy and Rent Report published by the Apartment Association of Metro Denver and conducted by the University of Denver, Lakewood north's average rents of $1,344 make it the fourth most affordable submarket behind Aurora central northeast, Aurora central north west, and Wheat Ridge, which has the lowest average rents in the city at $1,192.

In terms of affordability ranking, Lakewood south is near the middle of the back ranking 23rd most affordable (or 15th most expensive) out of 37 submarkets monitored.

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