Is the rental market moving towards equalibrium

To be honest I have no idea. However according to The Denver Post in an article titled Rising Vacancy Rates Signal a Shift in Metro Denver Apartment Market  there has been a surge concerning vacancies. While this is not to be unexpected due to the massive supply having come on line in recent months, those like myself with some history in Denver are reading the tea leaves and the word pessimism keeps forming.

Denver real estate is not immune to boom and bust cycles. Since moving here in 1984 I have been through three (3) cycles of the market. What concerns me about this newest cycle is the following:

  1. Apartments (rental and condo) being constructed throughout the metro area based on pro-formas targeting deluxe and luxury market which is truly a finite market.
  2. Asking rents and PSF prices sans correlation to average income in the metro area.
  3. Assumption that demand will continue to outstrip supply (sorry folks we are not in New York or San Francisco).
  4. Increased Density in a marketplace which generally values personal indoor and outdoor space.
  5. Apartments with common area amenities while skimping on size; while attractive to millennials, guess what, millennials do age and their desires change.

Such cycles are old news. I still remember when Parkway Center and Uptown Village came on the market inclusive of rental incentives. For some perspective during the summer of 1987 (yes almost 30 yrs ago), I worked in downtown Denver for the summer while attending CU Boulder during the school year. I was able to rent an apartment at One Denver Place, a one bedroom on the 25th floor (unit #2507) with an unobstructed view of downtown, including parking and utilities. With my rental furniture bill, the monthly was approx. $500.00 which at the time was considered slightly above market. When I graduated CU and moved to Denver full-time my first apartment, an expansive one bedroom with an enclosed sun room at 900 Lafayette was a whopping $400/month. During these times there was a general glut of rentals on the market and rents were in line with average incomes.

Even in the early 1990’s as Denver began to climb out of the energy sector recession one was able to purchase units at The Barclay Towers downtown for $50K including parking and either mountain or city views coupled with below market financing provided by the sponsor/developer. Granted during this time LoDo was in its infancy, the loft trend had yet to gain traction and the Platte Valley was literally a dust-bowl, how times have changed.

Granted between natural inflation, an expanding population (yes folks even with the snow we are considered pseudo sun-belt) and other factors it is natural for prices to increase and trust me I look back and concerning some real estate purchases say to myself “Could Have, Should Have and Didn’t”. While hindsight is truly 20/20, history is known to repeat itself as we rarely learn our lessons.

With the many apartments and condos still to come on-line in 2016 and beyond (just look at the skyline of Cherry Creek North and west of the Denver Country Club) do not be surprised to see developers providing incentives and other marketing perks to increase occupancy.

As a broker working in the deluxe and luxury market niche I understand these clients are as mentioned are a finite resource. There are only so many out-of-state buyers and mountain residents  looking to drop $1M+ on a pied-a-terre condo in Cherry Creek North or $2,000+/month for a Manhattan sized apartment in downtown or Cherry Creek.

Looking at the macro picture long-term I am not as concerned about absorption. As baby-boomers age, condos and multi-family maintenance-free living becomes more attractive. Denver will always attract the youngest and brightest due to lifestyle, climate and an overall entrepreneurial orientation. However for the immediate future i.e. 1-3 years, I personally am a little concerned. If I were bringing such product out of the ground over the next 1-3 years I would be considering contingency plans from price correction to financing concessions to rental incentives to owner will carry.

 

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