1Q21 Denver Multifamily Market Report

March, 2021

Corporate Growth and Economic Advancement Aid Fundamentals Across Apartment Tiers

Dual employment segments exhibit resiliency. Denver’s tech industry helped shield the market from the impacts of the COVID-19 induced shutdown as many professionals transitioned to remote work. The strength of the sector enabled the metro to retain and recapture a higher percentage of jobs than many U.S. markets last year. The transportation and warehousing segment also expanded, benefiting from the growth of e-commerce. The performance of both industries fueled apartment demand, supporting positive absorption in each quarter of 2020. Continued job creation in these fields, vaccination efforts and the rollback of business restrictions should boost spending at restaurants, bars and entertainment venues in 2021. The improvement in leisure and hospitality-related hiring has the potential to lift demand for lower-cost rentals.

Company relocations elevate high-paying job count. Denver’s lower cost of doing business and sizable cohort of well-educated residents continue to attract organizations. Palantir Technologies, Healthpeak Properties and VF Corp. all established headquarters in the metro late last year. Additional corporate growth is lined up as Japanese-based iSpace Inc. will set up local operations and Vectra Bank is building a nine-story headquarters in the Denver Tech Center. When hiring, these firms may recruit from outside the market, translating to relocations and household formation that could bolster demand for Class A units.

Return to school to support retailers. After spending the past year at home, school reopenings are occurring at a heightened pace. A decline in school-related spending has been a significant drag on many shops, particularly apparel stores. Sales at clothing retailers are down 11.3 percent year over year, the third largest annual decline among major retail businesses. Department stores, which also rely heavily on school spending, recorded a 14.5 percent yearly decrease in sales in February. As schools reopen, more parents will also be able to return to work and will opt to update their wardrobes after a year away from the office.

Multifamily 2021 Outlook

EMPLOYMENT:

Fueled by technology, logistics and service industry-related job creation, the metro recaptures nearly half of the 68,900 positions lost last year, translating to a 2.1 percent rate of employment growth.

CONSTRUCTION:

Apartment inventory expands 2.2 percent this year as deliveries trail the prior-five-year annual average of 8,360 units. Finalizations in suburban submarkets are slated to account for 60 percent of the units added in 2021.

VACANCY:

Renter demand keeps pace with deliveries, translating to net absorption of roughly 6,800 units. This leasing activity drops metrowide vacancy to 5.0 percent, the lowest year-end rate since 2015.

RENT:

After the health crisis halted a 10-year streak of positive annual rent growth, tight vacancy and economic improvement in 2021 enable a rise in the metro’s average effective rent to $1,539 per month.

2020 Market Performance

CONSTRUCTION:

7,998 Units Completed

• Completions in 2020 grew rental inventory by 2.7 percent. Still, delivery volume trailed the prior year, when 8,520 units were finalized.

• Led by supply additions in Northeast Denver, suburban deliveries totaled 4,650 units last year. Urban Denver added 3,350 apartments, including 1,850 doors in Downtown-Highlands-Lincoln Park.

VACANCY:

0 Basis Point Change in Vacancy Y-O-Y

• Increased demand for suburban rentals allowed metrowide vacancy to hold at 5.1 percent and net absorption to exceed the 7,000-unit mark for a fourth consecutive year.

• Class A unit availability rose 60 basis points last year, while the Class B and C vacancy rates dipped 10 and 30 basis points, respectively.

RENT:

0.5% Decrease in the Average Effective Rent Y-O-Y

• Suburban rent adjusted nominally in 2020 while the monthly rate in urban Denver fell by nearly 6 percent. This combination lowered the metro’s average effective rent to $1,509 per month.

• Declines in Class B and C vacancy allowed both apartment tiers to record positive rent growth, albeit below 1 percent.

Investment Highlights

• Sales activity fell 10 percent in 2020, yet the number of transactions exceeded the 200-mark for a seventh straight year thanks to a historically strong fourth quarter. During the October through December period, more than 100 properties traded, totaling $2.9 billion in sales volume. Out-of-state buyers and local investors were equally active, namely in closer-in suburban submarkets.

• Entering 2021, average pricing sat at $205,500 per unit, following a 4 percent annual gain, while the average cap rate rested at 5.2 percent. Preliminary data from the first quarter suggests investors are confident in the strength of Denver’s long-term fundamentals with early-year deal flow paralleling activity recorded prior to the health crisis.

• Suburban-focused buyers have been active in Lakewood and Aurora since the onset of the pandemic, acquiring 1950s- to 1970s-built Class C complexes. Downtown and East Denver are garnering the attention of out-of-state investors as elevated development has increased the number of newer properties available for acquisition. In both locales, these assets are trading at high-3 to low-4 percent cap rates.

Denver Office:

Adam Lewis Vice President, Regional Manager

Prepared and Edited By:

Erik Pisor Research Analyst | Research Services

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment growth is calculated based on the last month of the quarter/year. Sales data includes transactions sold for $1 million or greater unless otherwise noted. This is not intended to be a forecast of future events and this is not a guaranty regarding a future event. This is not intended to provide specific investment advice and should not be considered as investment advice. Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Real Capital Analytics; RealPage, Inc. © Marcus & Millichap 2021 | www.MarcusMillichap.com