Page 8 —
COLORADO REAL ESTATE JOURNAL
— April 20-May 3, 2016
Multifamily
by John Rebchook
Apartment broker Greg John-
son did the math and has come
to the conclusion there is a good
chance that the Denver-area
apartment market vacancy rate
could hit 10 percent this year.
That would be a 47 percent
increase from the 6.8 percent
vacancy rate at the end of the
fourth quarter, according to the
Apartment Association of Metro
Denver.
If the vacancy rate does hit 10
percent, it would be the first time
in 12 years.
And the last time the vacan-
cy rate stood at 10 percent, the
market was actually recovering
from the record-high 13.1 percent
vacancy rate set in the second
quarter of 2003, noted Johnson,
who is a partner with Kyle Mal-
nati at Madison Commercial
Properties.
What is driving the rising
vacancy rate is the current build-
ing boom. One might even call it
an overbuilding boom.
“We are in the process of doing
what Denver has always done.
We overbuilt
the market
during
the
good times,”
Johnson said.
J o h n s o n
is basing his
projection on
a variety of
sources.
“We look at
all of the data
from the Apartment Association,
Cary Bruteig and Bill James, and
they all seem to be in agreement
that there are about 20,000 units
under construction,” Johnson
said.
“We anticipate that 12,000 of
those will be completed this year,
which I think is conservative,”
he said.
Last year, the market had a net
absorption of a mere 864 units,
according to the Apartment
Association.
If the absorption doubles to
2,000 this year and 12,000 new
units come on line, “and you do
the math, that gives you exactly
a 10 percent vacancy rate,” John-
son said.
However, Bruteig, owner of
Apartment Appraisers & Con-
sultants, at a recent multifamily
conference he and the Colorado
Real Estate Journal sponsored,
reported markedly different
absorption numbers last year.
Therewere7,901unitsabsorbed
in the seven-county area in 2015,
according to Bruteig. That was
down from about 8,300 units in
2014.
However, both years far out-
paced the average yearly absorp-
tion of about 5,000 units, accord-
ing to Bruteig.
Bruteig also placed the overall
vacancy rate at 4.87 percent at the
end of 2015.
Another way to look at it: The
vacancy rate would have to more
than double to hit 10 percent,
based on Bruteig’s numbers.
Still, a number of speakers at
the conference agreed that too
much supply is being added to
the Denver-area market.
Also, the cranes constructing
these new, luxury communities
are mostly found in downtown
Denver and nearby neighbor-
hoods, from the Golden Triangle
to West Highland.
The concentration of the new
supply is increasingly a cause
of concern among apartment
experts.
One of them is Johnson.
However, there is no denying
the underlying economics, job
growth and population increases
are bullish signs for the economy
and the apartment market, he
said.
“Rising vacancy rates are being
caused by an oversupply, not by
a lack of a demand,” Johnson
said.
While construction is concen-
trated in downtown Denver, ris-
ing vacancy rates will be across
the board, he said.
“That is a slice of the story that
a lot of people don't think about,”
Johnson said.
A lot of apartment owners, he
said, don’t think overbuilding is
going to hurt “their” property.
“They think the only ones you
have to be worried about are in
the Ballpark area and other core,
central Denver neighborhoods.
But those people are wrong.”
He said he looked over 18 years
of data from the late Gordon Von
Stroh, a University of Denver
professor, “and it clearly shows
vacancy rates move across the
metro area” at roughly the same
pace, no matter the geographic
area.
However, from a macro-stand-
point, rising vacancy rates from
overbuilding always are prefer-
able to the market softening from
a slow economy, he said.
“Our market recovers much
faster from overbuilding than
when it comes from a down
economy and people are leaving
the area,” Johnson said.
The worst-case scenario, of
course, is when there is both
overbuilding and the economy is
going south.
That happenedduring themid-
1980s, during the crash of energy
and saving and loans, as well as
during the early 2000s when the
dot-combubble burst, whichwas
followed by the terrorist attacks
on Sept. 11, 2001, he noted.
Still, a 10 percent vacancy rate
will have a dramatic impact on
the market.
“What that means is we will
flip from a landlord’s market to
a renter’s market,” Johnson said.
That doesn’t necessarily mean
that rental rates will go down,
although it can, especially in the
new Class A properties in and
around downtown Denver, he
said.
What seems almost certain is
that rents no longer will see dou-
ble-digit increases, he said.
“Rents will plateau and, in
some markets, we will see mod-
est declines,” he said.
Smaller mom-and-pop owners
will lower monthly rents, while
institutional owners will tend
to provide concessions, such as
months of free rent, he said.
Cap rates will remain low, as
long as interest rates remain low,
he said.
“Cap rates will continue to be
driven by interest rates,” Johnson
said.
Johnson and Malnati are advis-
ing owners to be realistic about
their projection for their proper-
ties.
“We tell them not to think
they will be the one to buck this
trend,” he said.
Buyers also should be conser-
vative as far as taking on exces-
sive debt, he said.
However, he remains bullish
on Denver for the intermediate
and long term.
“I want to stress that this is a
short-term phenomenon,” John-
son said.
“Yes, it might take three years
to absorb all of this inventory,”
he said, but the longer the time
horizon, the better the outlook for
rental properties.
Also, investors who plan to
own apartments for the long
term shouldn’t hesitate to buy
today, even if the market faces a
temporary softening, he said.
Buying an apartment is not
exactly like buying a blue-chip
stock when the market is down,
he said.
“Blue-chip stocks are always
available and are always liquid,”
Johnson said.
“Blue-chip apartment proper-
ties inDenver are far more scarce.
They are not always available. So
if you spot a good asset this year
and you want it, buy it.”
s
This chart from the Apartment Association of Metro Denver show his-
torical apartment vacancy rates.
Greg Johnson
“
A lot of
apartment
owners
don’t think
overbuilding
is going to
hurt ʻtheirʻ
property.
”
– Greg Johnson, Madison
Commercial Properties
