3Q21 Denver Multifamily Market Report

September, 2021

Mid-Tier Suburban Metrics Enhanced by Changing Renter Priorities, Garnering Investor Attention

Class B units in suburbs accommodate fresh preferences. Mid-tier rentals outside Denver’s core performed exceptionally well during the past year as the segment carved out a niche in the local apartment landscape. The suburban Class B tier met the qualifications tenants were seeking as many desired lower-cost living and larger floor plans while working remotely. Additionally, less crowded areas were favored amid the health threat. Looking at the metro’s 17 suburban submarkets, eight posted Class B vacancy declines of at least 100 basis points during the past year. Three of those - Broomfield, Highlands Ranch, and the Tech Center - had reductions of 200-plus basis points. Lower vacancy provided a tailwind for rent as well. Six different suburban locales noted double-digit annual mid-tier rate hikes.

Slowdown in downtown development eases pressure. Deliveries in the central business district shrunk relative to prior years, which has helped the area find footing after a difficult stretch in 2020. In the first half of this year about 1,040 rentals finalized in the CBD, the lowest total during the January through June period since 2017. Fewer additions allowed demand to catch up, dropping the vacancy rate from a peak of 7.1 percent last year to 5.9 percent in the second quarter, a level about on par with the pre-pandemic recording. The pullback in new supply will be temporary, however, as nearly 6,000 units were underway downtown as of July, with the majority expected to reach completion by the end of 2022.

 

Multifamily 2021 Outlook

 
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EMPLOYMENT:

Denver’s employment total will climb within 1 percent of the pre-health-crisis level in 2021 after the loss of 104,800 positions last year. This will be the fastest annual gain in more than 30 years, with the metro job count expanding by a projected 6.6 percent.

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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.

 
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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.

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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.

 

2Q21 - 12-Month Period

CONSTRUCTION:

6,169 Units Completed

  • Construction activity curtailed during the past four quarters, with delivery volume coming in 3,000 units below the previous year. As of July, and additional 19,000 rentals had broken ground in the metro.

  • The Five Points-Capitol Hill-Cherry Creek submarket added 350 units in the first half, compared with 3,200 doors in the preceding two years.


VACANCY:

100 Basis Point Decrease in Vacancy Y-O-Y

  • Availability moderated to 4.4 percent in June, which was the lowest vacancy since September 2019. In the second quarter of 2021, the rate fell by 100 basis points on net absorption of 4,550 units.

  • Class A and Class B vacancy fell to 5.0 percent and 4.3 percent, respectively, the tightest rate for each tier in nearly two years.

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RENT:

5.9% Increase in the Average Effective Rent Y-O-Y

  • Dictated by a 6.6 percent year-over-year hike in the suburbs, the metro’s average effective rent jumped to $1,605 per month. The mean rate in the CBD remained down 1.0 percent from a year ago, however.

  • The average Class B rent rose by 8.2 percent annually, outpacing the other two tiers where rates climbed by less than 1.5 percent.

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Investment Highlights

  • Deal flow improved dramatically in the first half of this year, with activity during those six months jumping by 250 percent relative to the same period in 2020. Competition for assets facilitated an 8 percent annual boost in the average sale price to $220,000 per unit. Assets that traded for more than $1 million during the past year ended in June had an average cap rate of 5.1 percent, down slightly from the prior year.

  • Trading of urban apartment buildings doubled on an annual basis during the 12-month period ending midyear. Out-of-state investors from both coasts have concentrated on Class A and B complexes in downtown Denver. Buyers accept yields in the low-3 percent range for luxury apartments, while mid-tier properties generally change hands with first-year returns 100 basis points higher.

  • Private investors seeking Class C apartments with upside are focusing on the Lakewood-West Corridor and South Adams County submarkets. Particularly, the northwest portion of Aurora as well as neighborhoods between Lakewood and Wheat Ridge are appealing. Lower-tier apartments in these areas trade for an average of $175,000 per unit.

 
 

Denver Office:

Adam Lewis Vice President, Regional Manager

Tel: (303) 328-2000 | adam.lewis@marcusmillichap.com

Prepared and Edited By:

Benjamin Kunde Research Analyst | Research Services

For Information on national multifamily trends, contact:

John Chang Senior Vice President, National Director | Research Services

Tel: (602) 707-9700 | john.chang@marcusmillichap.com

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