2018Q1: Where is the Rental Market Heading?

Where is the Rental Market Heading?
Central Denver Apartment Market Report: Cover page of our 2018 Q1 newsletter

Thoughts of where the market is heading are increasingly on our clients’ minds. Is the Denver rental market about peak?  Without a clear answer, it’s helpful to look at the factors that determine the direction of the market.

Economists describe the four phases of the real estate market cycle as Recovery, Expansion, Hyper Supply, and Recession.  The expansion phase is characterized by rising rents, declining vacancy, and escalating apartment construction.  The hyper-supply phase, during which the market peak is reached, is characterized by robust construction activity, increased vacancy, and the flattening of rental rates.  Denver is clearly in one of these two phases that are both near the top of the market.

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According to the data provided by the Apartment Association of Metro Denver in its 1st Quarter 2018 report released at the end of April, 13,348 new apartments were completed last year, and over 30,000 total units have been constructed since 2015.  More apartments have been built over the past three years, than in the ten-year period prior to that (2005-2014).   With 30,000 more apartments under construction today, according to Cary Bruteig’s Apartment Insights report, we are certainly experiencing “robust” construction across Denver.

While rampant construction activity points to the hyper-supply phase in the market cycle, current rental rates and vacancy levels do not.

The AAMD reported the metro-wide vacancy rate dropped to 6.1% in the first quarter, down from 6.4% in the fourth quarter of 2017.  The 6.1% vacancy figure is up from a year ago, and the same as Q1 2016, two years ago.  Drilling into the details of the report, the vacancy rate in older Capitol Hill buildings (described in the report as properties with 9-50 units) was only 3.7% for Q1 2018, down from 4.6% a year ago.  All of the new construction activity has yet to increase vacancy in Central Denver’s existing buildings.  In fact, one of the largest management companies in the neighborhood reported vacancy of only 1% in its portfolio for March.

Rents have remained resilient throughout the construction boom.  The average one bedroom apartment, excluding new construction, now rents for $1,096 per month.  That is a 9% increase from three years ago (2015-2018), but then again, it’s only a 9% increase.  In the three-year period prior to that (2012-2015), one bedroom rents increased 37%!

Predicting the exact market peak is nearly impossible.  We won’t have a clear view of it until we’re looking at it in hindsight

by Greg Johnson 

CalibrateRealEstate127

Calibrate Real Estate
900 East Louisiana Avenue #203, Denver, CO 80210
http://www.DenverApartmentBuildingsForSale.com
http://www.CalibrateRE.com

2 responses to “2018Q1: Where is the Rental Market Heading?

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