Industry News

Market Reporting that Matters

Outlook for Denver Apartments: Not So Rocky

Rent Growth Should Rise After 2016 Fall

By Louis Rosenthal | Monday, March 13, 2017

 

Following a tremendous year of near-double-digit rent growth in 2015, the market for Denver apartments fell back to earth in 2016 and, despite some improvement in the first two months of 2017, remains well below its cycle peak of two years ago. Nevertheless, Denver’s supply and demand fundamentals point to a bright outlook for the apartment market over the next few years — if not the boffo levels that characterized the earlier years of the present real estate cycle.


 Click to enlarge in new tab

 

As of February 2017, apartment effective rents in Denver increased by 3.2% from the year before, according to Axiometrics apartment market research. The average effective rent for units increased by $43, from $1,344 in February 2016 to $1,387 in February 2017. The national average, on the other hand, increased by only $28. Denver’s occupancy rate was 94.0% in February, down 89 bps from February 2016, but still above the metro area’s long-term average of 93.4%.

The causes of Denver’s softening apartment market can be traced back to changes in the supply and demand fundamentals that, at one point, generated a monthly annualized growth rate of 12.8% (in February 2015), but today are producing growth rates that are about average for the top 50 markets in the country.

 

 Click to enlarge in new tab

 

On the supply side, Denver has experienced a veritable apartment construction boom in recent years, with more than 37,000 new units delivered since 2010 (and more than 8,000 units delivered in 2016). Despite the heightened level of new apartment deliveries, Denver is poised to add another 11,000 new units in 2017, which represents the construction peak for this cycle for the Denver metro area, based on Axiometrics’ models.

On the demand side, Denver job growth was 3.2% in December 2016, the last month for which data is available. That was a slight decrease from the month before and well below the 4.6% job growth rate posted in February 2015 (which coincided with the metro area’s rent growth peak this cycle).

 

 Click to enlarge in new tab

 

The supply and demand factors can be combined into a single indicator of market strength: a demand-supply ratio in which higher values indicate a market with more jobs created than units available. Using this indicator, 2.7 jobs were created in Denver for every new unit delivered to market in the fourth quarter of 2016. While still a “seller’s market,” there has been a significant moderation in the demand-supply ratio compared to this cycle’s peak in the fourth quarter of 2012.

Denver’s overall market performance obscures variation in performance at the submarket level—particularly when comparing the urban core and the suburbs.

 

 Click to enlarge in new tab

As in most major metro areas, Denver’s urban core apartments have underperformed the suburban submarkets’ average for most of the current cycle. Since 2010, average downtown Denver rent growth has been 4.9%, compared to the suburban average of 6.8%. In 2016, urban core rents grew, on average, by 0.6%, while suburban submarkets saw average rent growth of 3.4%. In February, downtown Denver rents grew by only 0.3%, while suburban rents grew by 3.5%.

 

 

 Click to enlarge in new tab

Despite the soft urban-core submarket, Downtown Denver is still on track to add about 2,300 new units in 2017, about equal to 2016 deliveries. The above map shows non-stabilized properties in the downtown area: Orange icons are properties currently in lease-up; blue icons are those under construction; and green icons are those still in the planning stage. With all of these new units still in the pipeline, Axiometrics is projecting a rent growth rate of less than 1% for 2017, significantly below the submarket’s long-term average growth rate of 2.9%.

 

 Click to enlarge in new tab

Strong supply and demand fundamentals are projected to maintain a healthy and sustainable apartment market in Denver in the long term. The number of jobs in Denver is projected to increase, on average, by about 2.1% a year through 2021, which is lower than this cycle’s average of 2.9% job growth, but still above the metro area’s long-term average of 1.7% job growth.

 

 Click to enlarge in new tab

 

The steady pace of job growth is welcome news for Denver, as the metro area is poised to add above-average levels of new supply over the next five years.  Axiometrics projects that Denver will add about 8,000 new units per year from 2017-2021, compared to about 5,400 for this cycle and 5,300 over the long-term.

Denver’s apartment market should remain strong, even if rent growth isn’t at the heights of 2014 and 2015. Above-average job growth, combined with a dearth of affordable single-family housing and promising demographics, will yield a growing apartment market with the seventh highest average annual rent growth rate among the top 50 markets over the next three years.

Louis Rosenthal

Louis Rosenthal

Real Estate Analyst

Louis Rosenthal researches and analyzes current apartment trends in the United States and correlates them with economic indicators. He also studies the urban landscape and other metrics to develop in-depth reports and presentations for clients. Louis recently earned his Master of Science in Public Policy, focusing on housing, landuse patterns, real-estate dynamics and economic development. He combines that knowledge with his four years of practical experience in tax analysis, regression analysis and presentations to develop insightful analysis. An accomplished writer, Louis’ work has appeared on Forbes.com and Axiometrics’ blogs, among others.

Javascript is not enable. This may affect content rendering. You can enabled Javascript in your Settings Menu.