Rising apartment vacancies rates continue to fuel concern that the Denver multifamily market is facing overbuilding.
As reported in the Feb. 3-16 edition of the Colorado Real Estate Journal, apartment appraiser Cary Bruteig’s research pegged the fourth-quarter apartment vacancy rate in the metro area at 4.87 percent, 74 basis points higher than 4.17 percent a year earlier.
Bruteig’s report was followed by another by the Apartment Association of that showed a much higher overall fourth-quarter vacancy rate of 6.8 percent.
That was the highest vacancy rate since it stood at 7.7 percent in the fourth quarter of 2009, during the Great Recession.
The fourth-quarter vacancy rate also jumped by 44.6 percent from the 4.7 percent rate in the fourth quarter of 2014, according to AAMD. That is the biggest year-over-year percentage increase since the second quarter of 2009, when the vacancy rate shot up to 9 percent from 6.2 percent, a 45.2 percent increase.
However, the rapid increase in the vacancy rate is no reason to panic, according to Jeff Hawks, an apartment broker with ARA Newmark.
“It’s really not that big of a deal,” Hawks said.
“It is really skewed by the number of building in lease-up, which may be the largest number we have seen in many decades.”
The rising vacancy trend began in the third quarter of last year, with a 28.2 percent year-over-year increase. In the first two quarters of last year, the vacancy rate fell from the comparable quarters in 2014.
Jerry Kendall, principal of Greenwood Village-based Multifamily Capital Partners, and one of the sponsors of the AAMD report, said the rising vacancies must be put into context to get a true picture of the Denver-area multifamily market.
“There is a story here,” Kendall said. “It is really a tale of two worlds.
“Yes, we are seeing increases in just about every category,” Kendall said.
However, most of the pain is being felt in the newer, luxury communities being built in and around downtown, he said.
“These are the movie stars of our little apartment world,” Kendall said.
“They are the sexy, expensive, headline-making stuff,” he said.
The truth is, only so many consumers, especially millennials, can afford to pay $3 or more per square foot in rent, he said.
And it could get worse, before it gets better.
“We are at a point of time where a lot of these new communities are coming on line, adding to the existing supply,” Kendall said.
Already, many downtown landlords are offering free rent and that trend will continue, he said.
Indeed, the AAMD put the “economic” vacancy rate, which includes concessions and discounts, at 13.7 percent, twice the actual vacancy rate.
Markets with a significant number of new buildings already are showing double-digit vacancy rates, he noted.
For example, Boulder, outside of the city, has a vacancy rate of 14 percent, according to the AAMD, while downtown Denver is at 11.4 percent.
Northwest Denver’s vacancy rate was at 17.4 percent, but that was because it is such a small market that it doesn’t take many new buildings that are in the lease-up mode to drive up vacancies, he said.
The other factor that makes the apartment vacancy rate look worse than it is, when you scratch below the surface, is reporting.
The institutional owners of the “movie star” properties are very good at reporting their data, he said.
“I know a guy who owns 750 older units,” Kendall said.
“His units are basically 100 percent occupied, but they don’t appear in the data, because he doesn’t report them,” he said.
A lot of “mom-and-pop” apartment owners don’t report their vacancy or rental rates, he noted.
“There is a glut at the higher end,” Kendall said.
“But if you remove all of the units that were built after 2010, our market is looking pretty healthy,” he said.
And with 10,000 people moving to Denver each year, the vacancy rates won’t last that long, assuming there isn’t some huge financial jolt to the economy, he said.
“A lot of apartment communities that are on the drawing board, but haven’t yet been started, won’t be built, during this cycle,” Kendall said
It already is becoming more difficult to raise equity for apartment construction and that trend will continue, he said, which will reduce the future supply.
“It all comes down to supply and demand, and right now we have too much supply at top of the market,” Kendall said.
