Denver's apartment market has been on a rocky path lately, but with fewer vacancies, higher demand, and an economic upturn, this mile-high city's market forecast has just improved.
Jobs get a big part of the credit. Denver-area employment is expected to grow for the second consecutive year, and employers could add more than 28,900 jobs—a 2.5 percent gain—in 2005. Leading the gains: a resurgence in venture capital that is expected to boost emerging tech companies. The hospitality and tourism industries also have stabilized, and passenger travel through Denver International Airport continues to climb. A large population of college-educated residents and a significant number of national and regional corporate headquarters offices also contribute to the region's renewed economic strength.
The city's positive employment outlook dovetails with a decline in apartment construction, which should boost the outlook for apartment owners. Developers will deliver 2,000 new units this year, down from 3,000 units in 2004—a change that should lower vacancy rates and boost absorption.
A significant portion—40 percent—of these new units will be built in Denver's central business district. Developable land in this area is scarce, but demand for urban living has soared. Condominium developers have turned their eyes to Denver, working on projects such as the Weir Building in the Potter-Highland Historic District and the Louisiana Station Lofts at Old South Pearl. Outside of downtown, Denver's eastern and northern reaches are expected to receive the majority of future development as land there is relatively flat and affordable.
Vacancy is forecast to decline for the third consecutive year, to 8.9 percent in the Denver metropolitan area. Net in-migration and rising mortgage rates, in addition to slower construction, figure heavily in this improvement. (Denver's population expanded by 450,000 over the past 10 years, two-thirds of which is attributable to net migration.)
Suburban Success Submarkets to the west of the city performed the best last year, and the high-growth southwest Denver area will continue to outperform. Additionally, ongoing revitalization in Lakewood helped to reduce vacancies in that sub-market by 190 basis points in 2004.
But not every neighborhood is on the upswing. Submarkets that will be slower to recover include Denver's south-central and west-central areas, where older apartment properties comprise a significant portion of the inventory. These buildings have been hit especially hard as newer properties offered substantial concessions to fill their vacant units, resulting in upward tenant migration from these older properties.
Denver's southeast corridor, which fueled most of the growth in the metro area during the past decade, has seen the most dramatic improvement in vacancy. At the end of 2004, this neighborhood's vacancy rate had dropped to 10.6 percent.
The improving economy and higher demand will also allow owners to increase rents modestly in 2005. Asking rents are expected to rise just under 1 percent, to $827 monthly. On the flip side, higher occupancy has come at a cost of higher concessions. Tenants currently receive an average of one and a half months' free rent on a yearlong lease. As a result, average effective rents dropped 1 percent in 2004, to $720 monthly.
Several submarkets are outperforming the region in both asking and effective rents. Strong demand for the growing northeast metro Denver sub-market has cut vacancies, enabling apartment firms not only to boost asking rents by 5.5 percent but also to reduce concessions by 10 percent. The Boulder and fast-growing Denver southwest submarkets are also performing well, with both areas currently posting rental increases of 5 percent.