Colorado Real Estate Journal -
Denver-area apartment vacancy rates are poised this year to fall to the lowest rate since 2000, according to a recent analysis of the market by Marcus & Millichap. “During the year, vacancy in the metro (area) will recede 30 basis points to 4 percent,” according to the report. Separately, the Colorado Division of Housing and the Apartment Association of Metro Denver reported the fourth-quarter vacancy rate at 5.4 percent, the lowest fourth-quarter vacancy rate since 2000, when it stood at 4.7 percent. “I think it is pretty safe to say that we will continue to see a decrease in vacancies and an uptick in rental rates throughout the year,” said Greg Price, an apartment broker with the Denver office of Marcus & Millichap. Marcus & Millichap, which is forecasting that Denver will boast the 14th best apartment market in the country this year, which is unchanged from 2011, said apartment demand will be fueled by growth in high-tech and energy sectors, as well as in professional and business services. The demand will more than offset the 200 percent increase in apartment units that are expected to come on line in 2012. Marcus & Millichap is projecting 2,500 new units opening their doors in 2012, compared with 838 in 2011. Price agreed, although he noted that the area didn’t benefit from as many jobs last year as many had projected at the beginning of 2011. “The fact remains that we still have about 30,000 more people moving to the state than moving out of the state,” Price said. “Plus, with stricter lender requirements it is tougher for people to buy homes. And there are a lot of people who could qualify to buy a home, but rent by choice,” which will help the market, he said. Many of the apartments that open this year will be along the north Denver corridor. “Completions will be spread across several submarkets, but Denver north accounts for the majority of the planned units,” according to the report. The Denver-area apartment market already was tightening without a robust recovery in the overall economy, the report notes. “Over the past two years, renter demand in Denver increased dramatically despite limited job creation. This surge can be attributed to above-average household formations, a declining homeownership rate and elevated foreclosures, which combined to support a 10 percent increase in the renter pool.” Some foreclosed homes will be alternatives to traditional rental units, but not a huge factor, the report notes. “While shadow rental inventory may rise this year as residential investors target foreclosures, the competitive threat to apartments remains minimal as vacancy among the single-family and condo rentals in the metro (area) has fallen below 2 percent.” The biggest gains, the report says, will be in submarkets that previously had been “hard-hit,” such as Denver-south/Glendale, north Aurora, and central and southwest Aurora. “Closer-in areas, such as Lakewood, Littleton and Englewood/ Sheridan, along with central submarkets, outperformed throughout the downturn and therefore have less room for improvement in this recovery cycle.” The underlying fundamentals will make the market attractive to both sellers and buyers, Marcus & Millichap says. “Transaction velocity will accelerate as elevated buyer demand and firming values encourage more apartment owners to list.” Historically low interest rates also will be a factor. “Low interest rates will provide further motivation, particularly among Class B/C owners who have achieved their return objectives. These owners would prefer to focus on assets with higher yields in secondary markets, or turnaround opportunities locally.” Meanwhile, private, out-of-state buyers will target Class A properties as long-term investments. “This trend began to gain traction last year, when velocity in the $20 million-plus segment rose nearly 60 percent, driven by activity in Littleton, Broomfield County, Lakewood and Denver proper.” Marcus & Millichap went on to say that 100-plus unit communities will command premium prices, “as demand exceeds for-sale inventory.” It said that cap rates for larger, performing Class B assets have compressed to the high 6 percent and mid-7 percent range, “but investors should achieve healthy returns as lenders compete aggressively” for business.