Apartment broker says apartment vacancies rates could hit 10% this year
Apartment broker Greg Johnson did the math and has come to the conclusion there is a good chance that the Denver-area apartment market vacancy rate could hit 10 percent this year. That would be a 47 percent increase from the 6.8 percent vacancy rate at the end of the fourth quarter, according to the Apartment Association of Metro Denver. If the vacancy rate does hit 10 percent, it would be the first time in 12 years. And the last time the vacancy rate stood at 10 percent, the market was actually recovering from the record-high 13.1 percent vacancy rate set in the second quarter of 2003, noted Johnson, who is a partner with Kyle Malnati at Madison Commercial Properties.
What is driving the rising vacancy rate is the current building boom. One might even call it an overbuilding boom. “We are in the process of doing what Denver has always done. We overbuilt the market during the good times,” Johnson said. J o h n s o n is basing his projection on a variety of sources. “We look at all of the data from the Apartment Association, Cary Bruteig and Bill James, and they all seem to be in agreement that there are about 20,000 units under construction,” Johnson said. “We anticipate that 12,000 of those will be completed this year, which I think is conservative,” he said.
Last year, the market had a net absorption of a mere 864 units, according to the Apartment Association. If the absorption doubles to 2,000 this year and 12,000 new units come on line, “and you do the math, that gives you exactly a 10 percent vacancy rate,” Johnson said. However, Bruteig, owner of Apartment Appraisers & Consultants, at a recent multifamily conference he and the Colorado Real Estate Journal sponsored, reported markedly different absorption numbers last year.
There were7,901unitsabsorbed in the seven-county area in 2015, according to Bruteig. That was down from about 8,300 units in 2014. However, both years far outpaced the average yearly absorption of about 5,000 units, according to Bruteig. Bruteig also placed the overall vacancy rate at 4.87 percent at the end of 2015. Another way to look at it: The vacancy rate would have to more than double to hit 10 percent, based on Bruteig’s numbers. Still, a number of speakers at the conference agreed that too much supply is being added to the Denver-area market. Also, the cranes constructing these new, luxury communities are mostly found in downtown Denver and nearby neighborhoods, from the Golden Triangle to West Highland. The concentration of the new supply is increasingly a cause of concern among apartment experts. One of them is Johnson. However, there is no denying the underlying economics, job growth and population increases are bullish signs for the economy and the apartment market, he said. “Rising vacancy rates are being caused by an oversupply, not by a lack of a demand,” Johnson said. While construction is concentrated in downtown Denver, rising vacancy rates will be across the board, he said. “That is a slice of the story that a lot of people don’t think about,” Johnson said.
A lot of apartment owners, he said, don’t think overbuilding is going to hurt “their” property.
“They think the only ones you have to be worried about are in the Ballpark area and other core, central Denver neighborhoods. But those people are wrong.” He said he looked over 18 years of data from the late Gordon Von Stroh, a University of Denver professor, “and it clearly shows vacancy rates move across the metro area” at roughly the same pace, no matter the geographic area. However, from a macro-standpoint, rising vacancy rates from overbuilding always are preferable to the market softening from a slow economy, he said. “Our market recovers much faster from overbuilding than when it comes from a down economy and people are leaving the area,” Johnson said. The worst-case scenario, of course, is when there is both overbuilding and the economy is going south. That happenedduring themid1980s, during the crash of energy and saving and loans, as well as during the early 2000s when the dot-combubble burst, whichwas followed by the terrorist attacks on Sept. 11, 2001, he noted. Still, a 10 percent vacancy rate will have a dramatic impact on the market. “What that means is we will flip from a landlord’s market to a renter’s market,” Johnson said. That doesn’t necessarily mean that rental rates will go down, although it can, especially in the new Class A properties in and around downtown Denver, he said.
What seems almost certain is that rents no longer will see double-digit increases, he said. “Rents will plateau and, in some markets, we will see modest declines,” he said. Smaller mom-and-pop owners will lower monthly rents, while institutional owners will tend to provide concessions, such as months of free rent, he said. Cap rates will remain low, as long as interest rates remain low, he said. “Cap rates will continue to be driven by interest rates,” Johnson said. Johnson and Malnati are advising owners to be realistic about their projection for their properties.
“We tell them not to think they will be the one to buck this trend,” he said. Buyers also should be conservative as far as taking on excessive debt, he said. However, he remains bullish on Denver for the intermediate and long term. “I want to stress that this is a short-term phenomenon,” Johnson said. “Yes, it might take three years to absorb all of this inventory,” he said, but the longer the time horizon, the better the outlook for rental properties. Also, investors who plan to own apartments for the long term shouldn’t hesitate to buy today, even if the market faces a temporary softening, he said. Buying an apartment is not exactly like buying a blue-chip stock when the market is down, he said. “Blue-chip stocks are always available and are always liquid,” Johnson said. “Blue-chip apartment properties in Denver are far more scarce. They are not always available. So if you spot a good asset this year and you want it, buy it.”
More information can be found here:
Greg Johnson (303-343-8333)
Kyle Malnati (303-358-4250)
Madison & Company Properties
1221 S. Clarkson St. #300, Denver, CO 80210