Hot. Low vacancy has made Denver “one of the top-rated cities for multifamily in the nation,” an executive with Apartment Realty Advisors informed the Denver Business Journal in July. “Apartments are getting red-hot,” an industry observer informed The Denver Post the same month. “Apartments have been getting warmer every quarter, and it’s because vacancy rates are quite low.” Low vacancy, of course, is a function of other factors, including strong demand and prudent development. The new trend, meanwhile, features a relative onslaught of development. Indeed, as reported previously, concerns over the possibility of a new round of oversupply within the next few years have been expressed by some observers.
For the time being, however, the market enjoys considerable strength. Demand has been running well ahead of new supply, vacancy has remained well below 5.0%, and rent growth has been substantially positive. Reis remains confident that the market will do well in absorbing its new inventory. Thus, the confluence of factors contributing to the strong demand profile should remain in place. The emerging recovery of the local single-family market, however, bears watching.
All recession-related impacts on overall market occupancy have vanished—almost as if there’d never been a recession. Indeed, the 4.3% vacancy rate recorded for the second quarter, same as the quarter before and down 120 basis points year-over-year, stands as the lowest on the firm’s records for this market since 2000. A decline to 4.0% is anticipated for year-end. Meanwhile, no change in the rate had occurred by the end of July. While Reis’ current analysis calls for an increase in vacancy to follow in 2014 amid increasing delivery volumes, it is not expected to be substantial. Second quarter vacancy rates for the Class A and B/C segments were
4.7% and 3.8%, respectively, unchanged and down 20 basis points from the quarter before.
SUPPLY AND DEMAND
Strong demand, low vacancy, favorable rates of job creation, and high population growth numbers have provided a strong foundation for the new apartment development cycle now underway. According to Reis’ mid September report on individual construction projects, 5,562 market-rate units were underway metro wide. To these can be added the 857 units that completed in 2012 through August. Demand, meanwhile, has been driving the market. The 3,173 market-rate apartments that completed construction over the two-year span 2010-2011 were drowned out by the 10,348 units of positive net absorption achieved over the same span. The 604 units of new supply added during the first six months of 2012 were roughly doubled by the same-period absorption total. And the year-end counts are expected to show an excess of demand over supply at more than a thousand units. Reis expects annual completion totals to rise each year through 2014.
Indeed, the new construction cycle, however, could greatly amplify completion totals over the coming period. Huge unit volumes remain in the planning-proposal pipeline, including large volumes intended for master-planned developments to be added over time. According to the U.S. Bureau of the Census, the 3,525 multifamily units approved for construction through the first seven months of 2012 (in structures with a minimum of five units) more than tripled the 956 reported for the comparable span of 2011.
Demand, meanwhile, is supported on a number of fronts. In the words of Marcus & Millichap, “The availability of employment is attracting job seekers to the region with the population expanding at an estimated 33,000 persons yearly. This growth has helped mend the housing market and with single-family home listings shrinking, home construction is spreading to the outer regions. This increase should not have a significant impact on apartment vacancy as housing prices, though contracting, are unattainable for many renters and hesitation toward homeownership is still prevalent.” Indeed, weakness in the single-family market in the form of foreclosures and uncertainty over the future of values has resulted in a substantial augmentation of demand for apartments. It is possible that as the single-family sector firms up, some elements of demand now enjoyed by the rental sector will be reduced. Thus, while Reis expects net absorption totals to remain substantially positive, the wide gap seen over same-term new supply will be reduced this year and effectively eliminated in 2013 and 2014 as the market swings into balance.
Measured by the year, losses in average rents as a result of the downturn were confined to 2009. The decline that year, moreover, ran at only about 1.0%. Those losses had been redeemed no later than third quarter 2010; growth has been strong since. At $944 and $856 per month, respective asking and effective averages for the second quarter of 2012 were up 1.3% and 1.5% for the period and were up 1.9% and 2.5% since year-end following gains of 2.2% and 2.5% in 2011. Respective rent gains of 4.0% and 5.2% are projected for 2012 all told. As of July, asking and effective averages had each shown additional gains of 0.5%.
At $1,132 and $763, respective second quarter Class A and B/C asking averages were up 1.3% and 1.2% for the period. “Over the past year, metro apartment owners posted a 2.8% rise in revenue as concessions contracted by nearly three days of free rent,” remarks Marcus & Millichap in its third quarter 2012 report on the local market. Additional reductions in concessions are expected.