Construction of apartment buildings is leading the Denver metro area’s building boom, with more than 19,000 units starting construction in 2012 and 2013 that are expected to be delivered this year. This is the most apartments this market has added in such a short period of time in more than 40 years.
This construction boom follows a stretch where we saw little multifamily development, which created a short-term need to catch up with current population growth demands. Some perceive this level of development as overbuilding, though recent population growth statistics may indicate otherwise.
The Downtown Denver area is particularly hot for apartment developers, with about 4,000 units under construction. The majority of this work is being done around the Denver Union Station transit station.
The activity is being fueled by the region’s population growth, which averaged 1.7 percent per year between 2007 and 2012, maintaining a stable expansion rate through most of the recent recession and recovery, according to the Metro Denver Economic Development Corp. The organization projects population growth — mostly attributed to strong net migration — will moderate slightly to 1.6 percent this year, which is more robust than the projected U.S. growth rate of less than 1 percent through 2020.
While some believe developers are overbuilding the market, statewide vacancy rates remain low at 5.4 percent in the third quarter of 2013. Although this is slightly higher than the 5.2 percent recorded during the same period in 2012, it hasn’t kept average rents from increasing.
Average statewide rents rose 5.2 percent during the fourth quarter, compared to the same period a year ago, reaching a new fourth-quarter high of $992, according to the Colorado Multi-Family Housing Vacancy & Rental Survey, published by the Colorado Division of Housing. In Metro Denver, average rents soared to $1,041, up from $870 in 2009, a clear indicator it’s a landlord’s market.
Vacancy rates varied considerably across the state. The Fort Collins-Loveland area’s vacancy rate dropped to a 10-year low of 2.1 percent, while Greeley’s vacancy rate increased to a two-year high of 6.3 percent. Vacancy rates in Grand Junction and Pueblo both remained at more than 6.5 percent because of flat job markets.
The unemployment rate for Colorado as a whole was 6.8 percent in October, down from 7 percent in August. Colorado’s unemployment rate is lower than the national rate of 7.3 percent, making it a particularly attractive market for apartment developers. Only time will tell if we have reached the over development phase of the construction cycle,or if continued population growth will support the growing number of apartment units in the Denver metro area.
By Jeff Johnson, Principal, Pinnacle Real Estate Advisors in Denver. This article originally appeared in the May 2014 issue of Western Real Estate Business magazine.