Multifamily Denver Market Report 2Q/23

Development Requirements Alter Urban Growth Trajectory as Commuters Identify Western Areas

Excerpt of Full Report:

RiNo headlines record construction pipeline. Prior to the approval of newly-enacted affordability regulations, multifamily development in the central business district fell dramatically amid uncertainty surrounding the city’s ruling. This resulted in downtown Denver welcoming its lowest number of new units in nearly a decade last year. Effective last July, apartments built within the city of Denver must now allocate 8 to 10 percent of units as affordable. Although this likely slows urban construction in the long-run, developers will increase inventory by the fastest pace on record during 2023. The RiNo neighborhood welcomes more than one-third of downtown units and 13 percent of the metro’s total deliveries. Proximity to nightlife and sporting venues draws popularity among young professionals and should keep promoting growth here. A slowed long-term pipeline, however, could put a lid on expanding vacancy downtown.

Front range suburbs flourish. As development requirements downtown weigh on the long-term pipeline, suburban migration likely continues. Since the reshuffling of housing preferences in 2020 and 2021, renters continue to identify western neighborhoods this year offering suburban amenities with urban proximity. The Arvada-Golden and Wheat Ridge areas are well-positioned for commuting professionals, many of whom take advantage of Class A rents below the segment’s downtown average. This has led to local vacancies that undercut the metro mean, although eased employment and household income growth may temper demand in the near-term.

2023 Market Outlook

1Q 2023 - 12-Month Period

CONSTRUCTION: 8,894 Units Completed

  • Adding 1,300 more units than the previous 12-month period, Denver’s inventory expansion totaled 2.8 percent year-over-year in the first quarter

  • A number of 200-plus-unit developments proximate to Interstate 70 near Green Valley Ranch were delivered this past year as developers continue to expand housing options north of Aurora

VCANCY: 290 Basis Point Increase in Vacancy Y-O-Y

  • Strong apartment demand resulted in a historic-low vacancy rate of 3.0 percent in the first quarter of 2022. Since then, increased construction activity and slowed household formation have pushed the rate to 5.9 percent.

  • Class A vacancy in Westminster recorded compression over the previous four quarters, the only submarket to do so

RENT: 4.3% Increase in The Average Effective Rent Y-O-Y

  • Gains eased from their record pace experienced in early 2022. This year’s modest increase brought the average effective rent to $1,861 per month.

  • Slowed local employment growth, in addition to notable inflation, drove demand for lower-tier units. As a result, Class C rent growth outpaced that of A and B over the previous yearlong period ending in March.

Investment Highlights

  • New affordability regulations for development downtown may have contributed to the submarket’s uptick in transaction velocity over the previous 12 months. Accounting for more than 10 percent of metro deal flow, investors here most frequently pursued pre-1970s-built assets in the 10- to 50-unit range near Capitol Hill and Speer amid proximity to the city center, as well as Cherry Creek

  • Denver’s average cap rate entered the second quarter as the highest among all major Rocky Mountain metros. Decompression in the opening quarter of the year, combined with rebounding in-migration and home ownership difficulties, should support rising investor confidence, despite elevated interest rates challenging yields experienced over the previous two years

  • Colorado recently ranked as one of the nation’s leading states in rent payment fulfillment for assets smaller than 50 units, with nearly 90 percent of renters meeting their obligations. As an added benefit to higher yields than nearby metros, this should continue to draw out-of-state investors, after accounting for nearly half of transactions during the previous yearlong period. Meanwhile, recently-enacted property transfer tax increases in Los Angeles may draw an expanded share of California investors here

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

Market ReportPeter StandleyMultifamily, Performance