For the second quarter in a row, the Denver metro apartment market was unusually tight, causing rents to skyrocket as the number of people looking for apartments outnumbered the number of units available.
Unless there is a big increase in construction, the market could remain under-supplied for months or even years.
The apartment vacancy rate in the Denver subway hit 3.7% in the second quarter and fell to 3.8% in the third, both near record lows, according to the latest Denver Subway Apartment Vacancy and Rent Report. Vacancies are tightest in northern Aurora at 1.1%, followed by Denver’s City Park neighborhood at 1.6%, Broomfield at 2%, and Golden and Longmont at 2.4%. In fact, apartments are snapped up as soon as they arrive on the market, with no reserve capacity.
“Every time you see vacancies below 4%, you see dramatic rent increases. Being below 4% vacant for two consecutive quarters is something very unique. This signals a very tight market, ”said Mark Williams, executive vice president of the Apartment Association of Metro Denver.
The average rent for apartments in the Denver subway reached $ 1,726, up 4.5% from $ 1,651 in the second quarter and 13.5% from the average rent of $ 1,522 in the third quarter of 2020. Average rents range from $ 1,666 per month in Adams County to $ 1,929 in Boulder and Broomfield Counties, with Denver at $ 1,725 per month.
Homeowners are charging more because the market will support it, and some feel they need to make up for losses suffered during the pandemic. But the big mystery is why there is so much more demand.
Tenants out of nowhere
Nationally, the country was adding about 300,000 new apartments a year and tenants were clamoring or “absorbing” a similar number of additional units before the pandemic, said Kimberly Byrum, senior director of real estate search firm Zonda at the time of the pandemic. of a webinar on Thursday. But this year, tenants are absorbing an additional 600,000 apartments, almost double what they usually do, pushing the vacancy rate down.
She estimates that about a third of that additional demand is from people whose plans to start renting last year were delayed by the pandemic, such as students or graduates who had returned to live with their parents. But where do the 200,000 “extra” households come from?
“We have no data that would point to a sudden population boom in the last quarter,” state demographer Elizabeth Garner said. “However, we expect that as jobs return and COVID becomes less of a problem, migration will return to pre-COVID levels.”
International migration, a key component of migration as a whole, has been largely lacking over the past 18 to 20 months, Garner said, although it has shown signs of a return in the past month. Population growth in Colorado has remained fairly stable during the pandemic, so an increase in the number of newcomers cannot explain the surge in demand. In addition, rent peaks occur simultaneously in several US cities.
“Migration has slowed down and is expected to be slower as Denver’s affordability is no longer the business it once was,” said Ron Throupe, associate professor of real estate at the University of Daniels College of Business. Denver and author of the Quarterly Apartment Report. .
In Denver, lease renewals have averaged about 40% in the five years leading up to the pandemic, according to data from Zonda. A majority of tenants have jumped. But over the past year, about 53% of Denver-area renters stay put.
Turnover is down significantly, which may have played a role in federal and state eviction bans, as well as rapidly rising house prices, which could prevent some tenants from buying.
It should also be noted that changes in households may result in housing demand distinct from population gains. If the quarantine forced an unhappy couple to throw in the towel, it created an additional outbreak. If a young adult canceled those stimulus payments or landed a well-paying job in a tight labor market, he or she might feel more confident to go it alone rather than double down with friends, said Drew Hamrick, vice-president. senior president of government affairs. with AAMD.
“When you feel full of money, you don’t take a roommate,” he said.
So the billions of dollars the federal government has pumped into the economy, from improved UI payments to direct stimulus payments, could help explain apartment shortages and much more.
No more supply needed
The distortions in demand are likely to be short-lived as the economy returns to a more normal base. But the apartment supply problems are likely to remain more entrenched, which could keep upward pressure on rents.
So far in 2021, Denver metro tenants have absorbed 14,365 units, surpassing the 13,708 units absorbed in 2018, which was considered a “boom” year. Apartment developers delivered 2,400 units in the Denver metro in the third quarter, while tenants purchased an additional 1,882 units, which explains the small increase in the vacancy rate in the second quarter. But overall, demand greatly exceeds supply this year.
It is a national problem. To balance the market, the country will need to add 500,000 apartments per year over the next several years, Byrum said. But she predicts the country will add around 300,000 units per year in the future, the maximum capacity developers can provide given existing constraints. Without an increase in supply, demand would have to fall by 75% to restore more normal occupancy rates.
Williams, citing figures from Apartment Insights, said 32,000 units are approved and under construction in the Denver subway, with another 90,000 units in some form of planning. The region has never seen such a large pipeline, he said. But the question is how quickly they can get out of the ground and to what extent local governments will allow them to come forward.
Labor shortages and supply chain disruptions are delaying construction of existing projects and these will need to be addressed. But Williams said the biggest bottleneck comes from government approvals and permits, with Denver ranking ninth out of the 50 largest subways for the difficulties developers face in completing their projects.
“If we could reverse that and make it an easier place to build, it would take rents a little bit down the road,” Williams said. “More supply means more affordability. “
Economic numbers support more construction and developers are ready to build more, but local governments need to facilitate rather than struggle to move these projects forward, Hamrick said, citing restrictions in places like Castle Rock, Denver and Lakewood.
“Lower vacancy rates and higher rents determine whether we are building enough units to meet demand,” he said. “We are not building enough units to meet demand.”