Apartment Market Exhibits Positive Signs

DENVER-A recent Apartment Research Report by Marcus & Millichap says that the local multifamily market offers investors healthy current income and potential for asset appreciation. And with the economy poised for solid growth and new supply limited, effective rents will continue to grow at a steady pace.

"The Denver apartment market is positioned for continued improvement over the next year," says Adam P. Christofferson, vice president and regional manager of the firm's Denver office. "New construction has fallen from recent highs and employment and income gains are fueling tenant demand. The market is well positioned for asset appreciation with occupancies and rents forecast to steadily improve. With regard to the investment market, per-unit prices are still relatively inexpensive compared to other growth markets."

The report notes that Denver-area employers are on track to add 29,500 positions in 2005, a 2.5% increase. The professional and business services sector is expected to add nearly 5,700 jobs, followed by the education and health services sector, which is on track to add 4,250 positions. Key growth drivers include the relocation of companies to the city and the flow of venture capital into the technology sector.

Also, only 1,830 apartment units are slated for delivery in Denver this year. Construction remains low compared to 2000 through 2003, when deliveries ranged from 5,800 to 8,200 units per year. While conditions are improving, the large spike in vacancy during the recent economic downturn has made developers wary of overbuilding, the report notes. Currently, the largest projects are positioned along the new T-Rex, Southeast Corridor light-rail route, which is on track to open in December 2006.

The report adds that the vacancy rate fell 1.3% during the first half of the year and is expected to decline further to 7.9% by year's end. "With employment growing strongly and new apartment supply limited, a significant improvement in vacancy is expected this year," the report notes. "Job growth is boosting apartment demand at a rate that is outpacing new development. The vacancy rate for class A apartments will remain higher than for class B and class C properties due to competition from single-family homes and the condominium market."

As fundamentals improve, asking rents are expected to rise 1.5% in 2005 to $834 per month. With vacancy improving, owners are beginning to limit concessions, and effective rents will rise 2.7%, according to Marcus & Millichap.

As far as various submarkets, the high rent levels in some of the new class A projects in Denver North brought the average monthly asking rent in the submarket up 10.9% during the past 12 months to $1,093. Concessions remain in place for many of the new projects, however, and effective rent growth was limited to 3.4% over the same period. Asking rents gained 4.4% in the Southeast Metro submarket during the past year to $881 per month; however, concessions kept effective rents flat at $694 per month.

Meanwhile, per-unit prices and transaction volumes are expected to grow steadily as the local economy continues to improve. Investment in Denver apartment properties is picking up, with dollar volume during the past 12 months exceeding $1 billion, a 34% increase from the previous 12-month period.