With Supply in Check, Denver Remains Optimistic about Absorption

Denver never had the run-up that other markets in the mountain area, such as Phoenix and Las Vegas, had, but the city delivered about 18,000 units between 2001 and 2002, at the same time that it lost a lot of jobs, which contributed to a huge influx of supply.

Denver—Apartment Realty Advisors (ARA) recently brokered the sale of a 78-unit, two property portfolio located in Aurora, Colo. JTA Properties purchased the property for $2,125,000, or $27,244 per unit.  The seller was represented by ARA Denver-based Terrance Hunt, principal and, Shane Ozment, senior vice president.

In the market overall, “cap rates are all over the board. We haven’t seen too much product to gauge,” Hunt tells MHN, though older products and those bank-owned deals are at about a 7 percent cap rate. Institutions typically look at properties by price per unit and below replacement costs, he adds.

“The best deals done over the last year have been more the core properties at a percent below replacement cost,” Hunt notes. “Now we are seeing caps go down so far and a lack of product on the market because of the unwillingness of sellers.”

Denver never had the run-up that other markets in the mountain area, such as Phoenix and Las Vegas, had, Hunt says, noting that between 2001 and 2002, the city delivered about 18,000 units, at the same time that it lost a lot of jobs, contributing to a huge influx of supply.

From 2003 to 2008, the metro absorbed an average of 5,000 units per year. “Because of that, we never delivered too much product, because you couldn’t justify it,” Hunt notes, adding that Denver’s occupancy peaked in 2007 at about 6 percent but was short-lived due to the current recession. “In 2009, we had 480 permits pulled, so literally the supply has been cut off,” he adds, pointing out that the current vacancy rate is closing in on 8 percent.

“Right now, we have about 3,000 units to go,” says Hunt. “Last year, when we lost over 60,000 jobs, we had positive absorption of almost 3,000 units—that’s attributed to [the fact that] we are still growing organically; we are 200 basis points below the national unemployment average.” And the metro’s demographics highlight the large number of Echo Boomers who will keep the supply in check.

Meanwhile, rents are mostly flat or declining slightly (in 2009, they declined about 70 bps), though they have picked up in the downtown area. But concessions are still relatively high, at about 8.7 percent. Despite all this, though, Hunt remains optimistic that the metro area will stabilize in the spring, given its place as a seasonal market.