MARKET SNAPSHOT: Denver Vacancies Closely Match Unemployment Rates

By Erika Schnitzer, Associate EditorDenver—Vacancy increases in the Denver metropolitan area are on par with the market’s employment rate, according to Grubb & Ellis’ Multi-Housing Market Trends report for first quarter 2009. The approximate 2 percent rate of vacancy increase was closely correlated to the 2 percent increase in unemployment.“In terms of strength of the apartment market, Denver is relatively strong compared to most other medium to large markets in the country,” notes Steven Rahe, senior vice president of Multi-Housing Properties, Grubb & Ellis Co. In the first quarter of 2009, vacancies increased 112 basis points—up to 8.2 percent. While increases were seen throughout the Denver metro area, submarkets near the area’s universities, as well as urban infill areas, are performing the best. With a vacancy of 2.71 percent, Boulder South has the lowest vacancy in the metro.With only two new projects delivered during the first quarter—the 212-unit Broadstone Vesta in the Southeast submarket and the 270-unit 6515 Union in the Denver Tech Center—the flat construction market is expected to help prevent the vacancy rate from increasing further. Approximately 4,000 units are slated for delivery by the end of the year. This figure represents half of all units in development, allowing for the pipeline to further dry up in 2010. Residential permitting overall was down 36 percent in 2008.While the metro saw on average 4,000 units added—and absorbed—to the market during the 1990s, Rahe anticipates that many developers will, whenever possible, deliver their units in 2010, rather than 2009. For now, “as far as absorption goes, it won’t be positive until the end of job layoffs.”In addition, Rahe tells MHN,  the Denver metro area has not seen a significant number of condo conversions to truly have a shadow market effect. However, he notes that more young adults are doubling up or moving back home, therefore impacting occupancy.Rental rates declined and concessions increased by $22 per sq. ft., equivalent to about 8.1 percent of gross rent. Asking rents average $857 per unit, or approximately $1.00 per sq. ft. The only submarkets that saw any gains in rental rates were those with newer product, such as Denver Southeast and Castle Rock. The investment market remains sluggish—if at all existent—Rahe notes, adding that he has seen only two transactions of properties with 15 or more units in the first quarter, while in the prior six months he had five transactions of properties ranging from 96 to 320 units—“Thank goodness we have Fannie and Freddie,” he notes. As elsewhere around the country, “The challenge is if there is an owner who wants to do a sale. Because of the challenges of the capital markets, it’s not an easy time to get a sale done,” Rahe tells MHN.While Class B and C properties have declined 10 to 20 percent off from the latest quoted asking rates, Class A properties have held fairly steady.  “On average, cap rates have risen, in the past 12 to 18 months, by 100 to 150 basis points, so that has a significant effect,” says Rahe.As far as when the market will turn around, Rahe expects that Denver will come out of the recession before many other major U.S. markets, due to the fact that it was one of the cities first hit by the recession. “I think we are a little bit ahead of the cycle compared to other cities with regard to the economy in general,” he says. “For other cities, there will still be a bit of a drag on the economy, whereas we won’t feel it. Our economy will be strong before lots of other U.S. cities.”(Click here to read last week’s Market Snapshot on Minneapolis.)