ECONOMY
RON THROUPE | UNIVERSITY OF DENVER
2016 So Far... and What to Expect
T
his past year has seen a continued
concern for the potential of overbuilding in the apartment market and a fall
back in rents and increased vacancies.
We do expect a slower rent growth period going
forward with vacancy spikes in certain submarkets
until household formations absorb supply. Job
growth and in-migration will be the determinants
of continued expansion of the apartment market.
To illustrate the worst case scenario going
forward, consider that the Denver metro area is
estimated to have 313,549 total units. It is projected that 8,600 units will be constructed in the
Denver metro area in 2016, not including any
properties of less than 50 units (ARA Construction Report). Assuming a current vacancy rate of
6% and a 100% vacancy rate for the newly built
units, the aggregate vacancy rate for the Denver
Metro area would rise to 8.5% from the current
6%. Of course that is not going to happen, but
gives some background to a worst case scenario.
Last year the State Department of Demography figures for population, in-migration and
household formation showed the ability for Denver to absorb additional housing units. In fact, not
enough housing units were created to keep up
with household creation due in particular to inmigration. For this year the expectations on
population growth are relatively similar, which
means a need for additional housing units. Another effect of the net in-migration we’ve seen
has been to drive the demand for new Class A
units, which in turn leads to rent growth for all
classes. For this quarter the average rent has now
surpassed the $1300 per unit level at $1,315.39,
for a quarterly increase of $23.50. It is somewhat
unusual to have an aggregate rent increase of this
amount during the typically slow first quarter.
There are dynamic changes
coming on housing
selection, especially in
terms of the choice of
detached vs. multi-family.
The scenario results in an ability to absorb
units as long as the local economy continues to
expand. There are some industries that have
fallen back (oil and gas) but recent national figures
In contrast, there are dynamic changes coming
on housing selection, especially in terms of the
choice of detached housing vs. multi-family housing. Historically 40% of household formation was
allocated to multi-family housing. However, in
recent years the percentage has been greater, with
most pointing at millennial’s lifestyle as the reason,
although other age segments have also contributed. The longer term expectations are that the
detached vs. multi-family percentages will move
back toward historic averages as millennials age
and create families, leaving multi-family developers with added competition for tenants.
showed Denver to exceed the national job growth
averages. Jobless claims for the nation were released April 21 and showed the lowest figure in
42 years. These numbers support the belief that
the economy is strong and we can expect economic and demographic forecasts to be closely in
line with outcomes for the upcoming year.
In summary, we expect absorption of apartment
units to continue with only a slight increase in
overall vacancy, although some submarkets are
ahead of themselves and will see vacancy and rent
incentives continue. Completions may lag (as they
did last year) due to labor shortages, which will
only help stabilize the supply and demand equation
for apartments.
Thank You to Our Vacancy & Rent Sponsors:
22 | TRENDS • MAY 2016
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