While demand has improved in the Denver multifamily market in 2023, the headwinds that caused the swift downshift in apartment activity in the second half of 2022 are still very much in play. Looming recession fears have some delaying household formation and domestic immigration, an important demand-driver for the Denver market, has contracted for the last two consecutive years after a decade of explosive growth.
Strong leasing activity began in January, ahead of the spring leasing season that typically doesn’t gain momentum until March. The uptick in demand at the start of the year boosted annual net absorption to 6,600 units, ranking Denver ninth in the nation on a nominal basis. But activity has fallen off in recent months when the market typically logs its highest levels of net absorption for the year.
Denver is near the top of a long list of markets expected to set new supply records in 2023. Vacancy has increased by 1.2% in the past year to 7.8%, and Denver’s apartment delivery timeline is projected to push
vacancies to levels not seen since the dotcom bust. New construction is concentrated in the top end of the market with more than 70% of the current construction pipeline consisting of 4 & 5 Star luxury projects. Competition for renters is eroding property managers’ ability to raise rates, and rent growth in this segment is now under performing relative to the more affordable 1, 2, and 3-Star segments. This is dragging down overall market level rent growth, which has decelerated below the national benchmark.
Downtown Denver, where 25% of new construction is occurring, ranks near the bottom of submarkets in terms of annual rent growth, increasing by just 0.5%. In the current uncertain climate, renters are seeking out affordability. Suburban submarkets that offer lower average rents like South Adams County and East have held up best, with annual rents up 3.9% and 2.7%, respectively.
Higher borrowing costs and stricter lending standards have made potential investment opportunities increasingly difficult to pencil out, discouraging both buyers and sellers from executing deals. As values fall
due to the rising cost of debt, bid-ask spreads have proven too difficult to overcome in a number of scenarios, leading sellers to hold onto their assets until more favorable conditions arise. Cap rates bottomed out late last year at about 4% and since then have been on the rise, increasing to 4.6% in the third quarter of 2023.
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