A cooled off single-family home market will have little impact on apartment demand in 2019 as metro vacancy is forecast to drop for the third year in a row, lowering the reading 30 basis points to 4.8%. Strong job creation and healthy in-migration will keep apartment availability limited, especially in western suburbs like Arvada, Wheat Ridge and northern sections of Lakewood. Recent and forthcoming light rail additions to these areas will greatly increase downtown accessibility, boosting leasing activity in the process.

Vacancy in Glendale also will remain tight as residents get priced out the core and seek more affordable spaces nearby. Its proximity to downtown entertainment and upscale shopping in Cherry Creek makes Glendale particularly attractive to young professionals. Rent growth in and around Glendale should pick up throughout the year as revitalization efforts progress and value-add investments take shape. Neighborhoods near the core undergoing rejuvenation, including Glendale, will take some pressure off tightening conditions in downtown as rehabbed living spaces provide residents additional (and generally more affordable) options than new units delivered in the central business district.

The market is projected to receive 11,800 new units in 2019; however, rapidly rising demand for urban dwellings will keep much of this year’s new construction in the core. The continued revitalization of Five Points along with initial riverfront development in Lower Downtown will bring roughly 1,300 units to each area. Capitol Hill also will receive several hundred new apartments, giving more rental options to the neighborhood’s vast millennial population. The Peña Boulevard corridor will garner significant interest from builders seeking higher land availability. Denver’s rapid expansion eastward will prompt further development in this area in the coming years, powering investor interest in the Mile High City.

A growing interest was found for apartment assets in Littleton over the past year, particularly near Arapahoe Community College, where cap rates for smaller Class C complexes sat in the high-5% to low-6% range, up to 50 basis points above the metro average. Local buyers were largely intrigued by this area and units traded for an average of $133,000. Adjacency to the light rail boosted the appeal of these assets. For buyers with deeper pools of capital, Glendale and Virginia Village served as viable options due to proximity to downtown and consistent tenant demand from students at the nearby University of Denver. Here, initial returns sat in the upper-4% to mid-5% band, attracting a mix of private and institutional-grade investors. At the same time, Class B apartments around Denver Botanic Gardens as well as City Park were pursued by a variety of institutional buyers. Rehabbing these properties to more closely compete with nearby Class A product was the strategy for many investors combing through this area.

The availability of debt for apartment assets remains elevated, spurred by the recent pivot by the Federal Reserve. Sourcing will be led by Fannie Mae and Freddie Mac, in addition to a wide array of local, regional and national banks, and insurance companies. Loan-to-value ratios are trending between 65% and 75% on stabilized properties. The decline in interest rates has rewidened the spread between cap rates and Treasurys, reducing lender concerns about the risks related to repayment and valuation at maturity. Development and value-add projects have seen more conservative lending due to concerns surrounding overdevelopment and the length of the business cycle, leading to a greater use of alternative financing structures such as mezzanine loans and preferred equity to cover the additional capital requirements.