WESTERN SNAPSHOT, OCTOBER 2004

Denver Multifamily Market

Adam Christofferson Vice President and Regional Manager Marcus & Millichap

Denver’s multifamily recovery has commenced. Vacancies are easing, and rents, which have bottomed out, will remain relatively flat during the remainder of 2004. The economy has begun to spin off new jobs, spurring employment growth for the first time in 3 years. While the market has vacant inventory to work through and equilibrium vacancy is not expected for another 24 months or so, many multifamily investors consider buying at Denver’s bottom an opportunity for strong revenue growth as the market heals.

Renewed job growth of 1.3 percent, or 15,200 new jobs, is expected this year. While high-tech manufacturing in Denver is rebounding, the gains have not yet translated into jobs, but market experts anticipate payroll expansion in this sector as 2005 approaches. The hospitality and tourism industries have stabilized, and passenger travel through Denver International Airport was up 4 percent in 2003, signaling that the worst may be over. The construction sector continues to contract, however, primarily due to the constrained supply pipeline of commercial properties and the slowing of residential development.

Approximately 3,000 multifamily units will be completed this year, a total in stark contrast to the more than 7,200 units delivered in 2003. Most of the new construction continues to occur in the city of Denver, with some of the largest deliveries expected downtown. JPI recently opened the 241-unit Jefferson at CityGate — which is already 91 percent leased — while Corum Real Estate Group will begin to lease its 8-story, 250-unit Premier Lofts property, which features luxury rental units and townhomes. The suburbs north of Denver are also attracting development. Greystar West has begun The Summit at Flatirons, a 500-unit, eight-phase upscale development located in Broomfield, Colorado. About 20 percent of the units have been delivered with the complex’s completion scheduled for April 2005.

Multifamily vacancies have come down from the peak in mid-2003, a trend that should continue. By year’s end, the overall vacancy rate will dip to 10.4 percent, down 50 basis points from the end of 2003. Vacancy in the northern Denver submarket, which includes downtown, is 12.8 percent. In the southeast portion of the metro area, including the areas of south Aurora and Parker, Colorado, the vacancy rate is 12.6 percent.

There should not be a further downward adjustment in the average asking rent, nor an increase in concessions. While vacancies will decrease, the average asking rent will remain flat at $815 per month. The average asking rent ranges from $761 per month in Denver to $1,024 in the Douglas area. Concession levels will also stabilize, resulting in a year-end average effective rent of $725 per month.

Denver’s apartment investment market has exhibited remarkable stability. Private investors continue to dominate transaction activity, rapidly acquiring smaller communities in desirable infill locations. Meanwhile, out-of-area buyers are showing up in greater numbers, viewing Denver’s cyclical bottom as a good time to invest. While the number of transactions has lessened, activity remains healthy and prices are holding relatively firm at approximately $63,000 per unit. The concentration of sales remains in the lower tiers of the market. For instance, during the past 12 months, the popular Capitol Hill neighborhood has accounted for nearly 24 percent of all transactions recorded citywide. The median price in the area is $61,117 per unit, while cap rates have fallen to as low as 6 percent in some transactions.

Sales of Class A properties accelerated in 2003, with more risk-tolerant investors seizing the opportunity to acquire upper-end apartment communities. Values in this sector currently run in the $95,000 to $120,000 per unit range, with cap rates less than 6 percent. Class B product is trading at cap rates in the low-6 percent range, with values ranging from $65,000 to $80,000 per unit. Buyers will continue to outnumber sellers, keeping values stable despite little improvement in market fundamentals. Cap rates will remain lowest in west Denver submarkets such as Boulder, Lakewood and Littleton, Colorado.

The Mile High City’s long-term prospects are strong, and, as the national economy improves, it will once again outperform many other U.S. cities. During the next 12 months, a gradual recovery is expected to take place. As a result, investment activity is forecasted to remain healthy throughout the year as buyers remain bullish on Denver’s long-term potential, viewing the bottom of the market as the right time to buy while interest rates are still low.

Adam Christofferson is a vice president and regional manager for Marcus & Millichap’s Denver office.

©2004 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.