Marcus and MilliChap 2015 Report

Growing Denver Economy, Surging Rents Stir Investor Demand

Strong job gains in the Denver metro will drive apartment demand this year, pushing up rents and increasing property incomes. Nearly every employment sector will add jobs, strengthening economic growth. Lockheed Martin recently announced plans to create roughly 500 high-paying aerospace jobs over the next eight years. Employment increases will keep developer optimism high; however, after a near record-setting pace in 2014, the construction pipeline will begin to ebb this year. Nearly half of all completions in 2015 will still be heavily concentrated near the urban core. Over the past several years, absorption has kept pace with increasing development; however, this year deliveries will outpace demand, elevating marketwide vacancy into the low-4 percent range. Yet, the rise in vacancy will be temporary as construction slows and new projects lease up. High demand for rentals will enable operators to lift rents at one of the fastest paces nationwide. Over the last few years Denver has ranked among the top major metros for rent growth, posting annual gains well above 5 percent since 2010.

Tight vacancy and rising income streams will drive up NOIs, attracting the attention of a wide array of investors from across the country and creating a competitive bidding environment for appropriately priced assets. Intense buyer appetite for assets in the Denver area will encourage owners who are looking to capitalize on recent appreciation to bring properties to market, supporting transaction velocity. Elevated prices in downtown Denver will push many private investors to look in suburban areas. Assets west of the urban core will receive the most attention from these investors due to the area’s supply constraints and proximity to downtown. Meanwhile, well-funded private equity and institutional buyers seeking additional yield will target listings of larger properties in the southeastern portion of the metro, especially in Centennial and Aurora.

2015 Market Outlook

  • 2015 NAI Rank: 5, Down 2 Places. Despite the second-highest rate of rent growth in the nation, Denver slipped two positions in the NAI. Ŷ Employment Forecast: Hiring will expand 3.2 percent this year as employers add 43,000 workers to payrolls. Last year, 40,000 positions were created in the metro.
  • Construction Forecast: After bringing online 9,400 units last year, developers will slow the pace of completions in 2015 to 7,400 rentals, a 2.9 percent increase in rental inventory.
  • Vacancy Forecast: This year vacancy will move up 40 basis points to 4.3 percent. A 10-basis point decline in vacancy was recorded in 2014.
  • Rent Forecast: Following a 9.2 percent surge in effective rents last year, operators will lift rents an additional 8.3 percent in 2015.
  • Investment Forecast: Recent deliveries of Class A apartments in downtown Denver will present new opportunities for institutional buyers. However, those looking for higher cap rates will search for properties near the Denver Tech Center and Interlocken.

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