Heightened Demand, Tight Inventory Reinforce Market

May, 2021

Denver’s multifamily market demonstrated an impressive level of resiliency throughout the health crisis, building on strong prepandemic fundamentals to reinforce investor confidence in Denver’s metropolitan statistical area. As of March, an impressive 93.5% of Denver area renters reported being up to date on their rents, 5% higher than the national average, according to data from RealPage. During the same period, Colorado apartment owners reported strong collection rates of 98%, down just half a percent year over year. Prepandemic, the Denver MSA benefited from high levels of population migration, strong household formation, a highly educated workforce and employment growth. These trends helped to buoy the market through the lockdown and have accelerated as Colorado experiences a wave of capital migration driven by investors looking to extricate themselves from more restrictive primary markets. The Denver MSA has proven to be an attractive option for out-of-state investors who, faced with extended pandemic recovery timelines, restrictive regulations and climbing tax rates in their primary market, are looking to move their capital elsewhere.

The largest sources of this influx in out-of-state capital are Oregon, California and New York. According to Marcus & Millichap’s sales data, transactions of apartment assets in Colorado involving Colorado-based buyers dropped 13% between 2019 and 2020, while transactions involving California- and Oregon-based buyers rose by 14% and 4% respectively.

Colorado stands out as a strong choice to investors in these states for many reasons, but a primary factor is Colorado’s 4.55% flat income tax rate. Compared to tax rates of 9.9% in Oregon, 133% in California and 8.82% in New York, Colorado’s tax environment offers investors the opportunity to increase cash flow, pay lower taxes, diversify their investment portfolios and eliminate burdensome government regulations. This decreased tax burden is a major driver for investors as well as those wanting to live and work in the state of Colorado.

Investors are not the only ones looking to move out of primary markets. Driven by severe lockdown restrictions, a desire for larger living spaces and the rise of remote working options, renters are also packing up and moving on. In 2020, Los Angeles, which already was experiencing outmigration prior to the pandemic, saw vacancy increase by 80 basis points year over year as almost 4,000 suburban rentals hit the market. New York City had a negative absorption close to 15.600 urban rentals, which equals 1.9% of the local apartment unit inventory.

Conversely, Colorado is the eighth-most moved-to state during the pandemic, with 1.34 people moving into the state for every person who moves away. The state’s comparatively strong market fundamentals and famously desirable lifestyle are attracting renters in search of a new home city. Urban net absorption in Denver was among the nation’s highest, with more than 2,000 additional units becoming occupied in 2020.

The effects of the mass migration of capital to the state are magnified by the nation’s uncertain economic recovery in the wake of massive federal relief efforts. In- and out-of-state investors alike are turning to real estate as a stable investment option largely protected from inflation. The combination of these factors has resulted in an inventory that is severely supply constrained with the number of available listings registering significantly lower than in previous years. Nationally, existing housing inventory was down 32.6% year over year in February and represented the largest annual drop ever recorded. Locally, the Denver MSA’s existing housing inventory was down 11%.

Heightened demand and tight inventory will reinforce Denver’s market fundamentals. Since the end of February, multifamily properties have seen a marked decrease in inventory and an increase in the number of offers. Assets that might have sat on the market a year ago are being sapped up. These trends are likely to continue, supported by interest rates that still sit far below prepandemic levels. Many owners took advantage of these historically low rates by refinancing their properties in 2020. Those refinanced properties will be held from the market, further contributing to low inventory, rising prices and a seller’s market. Projected new construction starts will compound this effect, falling well behind the prior five-year average and expanding by just 2.2%, or 6,820 units, in 2021.

Inventory limitations are particularly apparent in Denver’s single-family market, with the median Denver MSA home price rising by 14% in the last year. These historically high single family home prices will help to drive apartment demand as potential home-buyers find themselves outpriced. This will have a positive effect on occupancy and rental rates for Class B and C apartments. Investors may experience more obstacles to purchase, including a lack of available inventory, high prices and increased competition. However, current owners and investors who can participate in the Denver market will benefit from a spring and summer of increased leasing, occupancy and values.