As we move into the second half of the year, now is an opportune time to consider how multifamily has performed in the opening two quarters of 2018. The combined markets of Denver and Colorado Springs are major markets tracked by our national firm and, compared to the same period in previous years, 2018 has been strong.
New supply. In the first six months of 2018, the markets added just under 5,500 new units. During the same span two years ago, that number was only 1,100. The area has been experiencing a new construction boom, and the flow still is increasing. In addition to the new supply delivered this year, 11,000 units already are under construction.
These likely will be entering the markets within the next 12 to 18 months. For reference, a total of 9,000 units have been delivered in the last 12 months.
Average occupancy and absorption. Average occupancy rose just over 0.6 percent in the first half of the year, slightly below the national average of 0.75 percent. Trailing the national average slightly isn’t much of a concern. The areas had above-average new supply to contend with, and the mark was still an improvement over the 0.2 percent gain during the same period last year. As of the end of June, average occupancy sat at 90.7 percent.
Net absorption, defined as the net change in the number of rented units, also has been strong. The areas absorbed almost 6,500 in the first two quarters and over 9,800 units year over year. After adding more units than were newly rented in the opening half of 2017, it’s a positive development that absorption has outpaced new supply by 1,000 units in 2018.
Average effective rent gain. With so much new supply, it’s no surprise that average effective rent growth outperformed the national average of 3 percent in the period – managing to hit 4 percent. While a 4 percent gain is very strong, and beating the national average sounds good, the fact remains there’s been a drop off compared to previous years.
During the first six months of 2017, average effective rent for the markets rose by about 5.7 percent. For the same span in 2016, there was a 6 percent jump. Rents can’t rise indefinitely, especially with wages largely flat for a decade and with the areas already above the national average for rents. So, a gain of 4 percent rather than a gain of around 6 percent isn’t a major red flag on its own. But, for markets still amid a construction boom, it bears noting that there appears to be less room to run than even two years ago.
Price class. We don’t segment markets by asset class, because those demarcation points can be subjective and change from market to market. Instead, we use price class and assign each property to a classification, A through D, based on its effective rent percentile in the market. At the top of the segment, average occupancy ended June at about 78.5 percent. Because this is the segment with new construction activity, an average occupancy below the stabilization threshold isn’t a surprise. The 78.5 percent figure represents a 3 percent improvement from the start of 2018 and comes despite the influx of about 2,100 new units. The top price class realized an increase in average effective rent of 4.4 percent in the period, down from 5.2 percent in the same span last year. This brought average effective rent per unit to about $1,880 per month for properties in this price tier. A decline of 0.6 percent isn’t a precipitous one. This points to the likelihood that slowing rent gains marketwide may be more a byproduct of slowing rent growth in the lower price tiers rather than less demand at the top of the segment.
Average occupancy to end June in price Class B was 90.1 percent – an improvement of just under 2 percent for the first half of 2018. Despite gaining ground from a year-to-date perspective, occupancy was the exact same to end June 2017. This shows the segment has been able to offset the new units pushed into it by the new supply in the top-price tier, but barely. Effective rent gain in this market segment topped that of price Class A by touching 5 percent. This means that an average Class B unit now costs nearly $1,600 per month.
The bottom two price classes led the way in average occupancy, with 92 percent for Class C and 95.5 percent for Class D. Each has gained less than 0.5 percent through the end of June, but began the year already quite high. The effective rent movement in these segments underperformed the market averages, but Class C properties still beat the national average of 3 percent with a 3.6 percent appreciation. The bottom tier saw growth of 1.2 percent in the period.
Takeaways. Metrics have remained strong to begin 2018, but due to the unabated influx of new units, the area is one to watch. Should new supply begin to outpace demand, or should there be any significant disruption to the economy at-large, the markets will be among the first to feel the effects. Having said that, average occupancy is within 1.5 percent of the national average while being among more active in adding new supply. Additionally, rent growth has slowed just as it has across most of the country, but still outpaces the national average. The outlook for the next six months to a year looks good. There’s little reason to believe the areas won’t continue their upward trajectory during that term, even if not at quite the same pace.