The Denver-area apartment market, which has benefitted by an unprecedented stretch of rising rents and falling vacancies, may finally be showing signs of falling back to earth.
However, no one is predicting the type of apartment bust that followed other boom periods, two experts recently addressed the potential that more supply is being added than is needed, especially in the downtown Denver area.
While demand is still strong in the Denver area, “we are putting up a little more than we need,” Glenn Mueller, a professor at the Franklin L. Burns School of Real Estate and Construction Management at the University of Denver, said at last month’s Emerging Trends in Real Estate conference. Emerging Trends is the annual national and local forecast by the Urban Land Institute.
Last year, there was demand for about 8,000 units and 10,000 were built, Mueller said.
This year, “there is demand for 9,000 units and we are putting up 12,000,” Mueller said.
“That is an over-supply,” he said. “We are building slightly more than we need.”
Separately, apartment appraiser Cary Bruteig, who published of Apartment Insights, an online data base and analytical report, recently released his fourth quarter report, which showed some softening of the market.
Bruteig’s findings include:
- In the fourth quarter, the overall vacancy rate of apartments with 50 or more units rose to 4.87 percent. That is not only 74 basis points higher than the 4.17 percent vacancy rate at the end of 2014, but also is the largest quarterly increase since the first quarter of 2009, in the wake of the global financial crisis, Bruteig’s report points out.
- Monthly rents showed the largest quarterly drop since Bruteig launched his report 11 years ago. The average metro-wide rent dropped by $20 to $1,293 or $1.50 per square foot. While a relatively small dip, it was the first quarterly drop in six years.
- Year-over-year, rent growth was 8.6 percent. While that is quite high, it represents a big drop from the 12.5 percent year-over-year drop from the third quarter.
- Average metro-wide concessions increased to $18 per month, the largest concession in almost three years. It also is almost four times the $5 per month concession in the third quarter. Concessions in the fourth quarter accounted for 1.39 percent of the gross rent.
On the positive side, demand is still strong.
Bruteig’s report shows that 1,470 units were absorbed, representing the best fourth quarter performance since he launched the report.
A total of 6,659 units were absorbed last year. That is the second best year in the 11 years of the survey. It was only topped by the record 7,071 units absorbed in 2014.
Healthy absorption reveals that rental demand is strong, the report notes.
“Therefore, we do not anticipate a rapid deterioration in the quarter ahead,” according to the report.
However, with the exception of absorption, most of the statistics showed a softening in the market.
The changes, Bruteig noted, “were fairly sudden and large.”
And while some of the softening can be attributed to more units being built than being absorbed, something the market will grapple with during the next couple of years, he also noted the softening was widespread and across the board, impacting “old and new properties alike.”
The softening occurred from Boulder to Parker and just about every market in between, including downtown Denver.
Terrance Hunt, an apartment broker at ARA Newmark, isn’t alarmed.
The softening, he said, is due in part to to seasonality and because a lot of new units hit the market during a time when few new renters are signing leases.
“Owners are managing their rent rolls to keep occupancies up,” by offering concessions, he said.
Hunt said over-building will not be a problem in the long-term or even the medium-term, but in the short-term, there is a bit too much supply in specific areas, most notably in and around downtown Denver.
“It is more of a micro-problem we are seeing,” Hunt said.
A lot of the same type of product is being delivered at the same time, in the same area at the same price point.”
“A lot of the same type of product is being delivered at the same time, in the same area at the same price point,” Hunt said.
However, that won’t go on forever, he said.
“It is becoming more difficult to get financing to build and we are running out of sites to build downtown,” Hunt said.
He said such “hiccups” in the market are to be expected.
“Long-term projections for Denver are very, very positive,” Hunt said.
The new office construction will mean more renters, as many of those young professionals will not be able to buy a home, or will prefer, to rent.
“And the Gaylord (hotel and conference center in Aurora) just announced it has its financing and that will create 10,000 construction jobs,” Hunt said.
“I don’t know where those workers are going to come from and where they will live,” he said.
“Long-term, growth is definitely going out outstrip the supply of apartments being built,” Hunt said.
David Potarf, an apartment broker with CBRE, also isn’t worried about overbuilding.
While the $20 per month drop in rent in the fourth quarter is the largest quarterly drop in 11 years, it needs to be put into perspective, he said.
“It was not a big drop,” Potarf said. “Twenty dollars is not very much money. To me, what it is saying is that we have been going up for 11 years and now we are seeing a little dip. I’m not concerned at all about it. Our fundamentals are really strong.”
Last year was a record year for apartment sales and it 2016 may not be able to top it.
“But we have been saying that every year for the past three or four years,” Potarf said.
“So who knows?”
