A surge in multifamily construction is creating a temporary bump in the road for the Denver market. However, the metro continues to look promising for the long term, says Greg Willett, first vice president and national director, research services, at Institutional Property Advisors, a division of Marcus & Millichap.
As 2024 begins, Willett says approximately 29,000 apartments are under construction and will grow Denver’s total stock by roughly 9% over the next couple of years. In 2024, 17,500 units are forecast to deliver, which is up sharply from last year’s 10,500 units. While the suburbs will still see new construction, the bulk of the new supply will be in the city, especially in urban core neighborhoods in and adjacent to downtown and in the northeast.
“Denver’s post-pandemic economic recovery got off to a fast start in 2021-2022, before a round of layoffs at some of the metro’s biggest tech companies temporarily stalled progress in 2023,” says Willett. “The near-term outlook is mixed, generally positive but with select industries still registering flat employment to modest expansion.”
He adds that one benefit to the multifamily demand in Denver is the buy-versus-rent equation. Among the nation’s major inland markets, Denver has the largest premium to buy versus rent, with the typical for-sale home having a monthly cost that’s roughly $2,900 above the average apartment rent.
While apartment demand is expected to fall short of completions this year, Willett says the metro’s vacancy rate is slated to climb to 7.1%, up from 6.2% at the end of 2023. In addition, average rents have flattened to around $1,900 per month.
“With so much new supply on the way, it will be tough to achieve rent growth at top-tier communities over the short term,” he says. “A key performance pattern to watch will be whether new deliveries get discounted enough to allow residents of the Class B stock to upgrade their residences.”
Willett notes that the price premium for Class A developments over their Class B counterparts has already diminished from about $400 to $300 per month, saying that could shrink even more. Resident retention at lease expiration also has been holding steady at the long-term norm of 50%, which is keeping renewal lease rent growth healthy at over 4%.
Like much of the country, transaction activity has been slow in Denver; however, Willett expects that trade volumes will pick up this year, especially in the second half, assuming interest rates stabilize and inflation is brought reasonably under control.
“Most apartment investors have strong faith in Denver’s big-picture prospect, and today’s pricing for quality assets looks very favorable relative to replacement costs,” adds Willett.