Denver apartment construction ramped back up last year, with thousands of new units coming online. The city’s rent growth is expected to slow — but still end the year up 9%. Victor Calanog, Head of Commercial Real Estate Economics at Moody’s Analytics, shares his analysis.
New units could lift Denver’s apartment vacancy rates
Effective rent growth accelerated in the third quarter in the Denver apartment market. Rents rose 4.3%, after the city posted quarterly growth rates at or around 1.7% for each of the first two quarters of 2022, according to Moody’s Analytics CRE.
Vacancy trends were flat, but at 5.4% the market has actually tightened by 100 basis points from pandemic peaks and is now below pre-pandemic vacancy levels of 5.6%.
Much of the tailwind Denver apartments enjoyed in 2021 was due to a significant moderation in supply growth, which dwindled to below 2,500 units in 2021. Moody’s expected a ramp-up in new apartments coming online in 2022 that could see 6,000 or more units opening their doors throughout the year.
That means we expect vacancies to rise slightly to around 5.5%. With an impending slowdown in the economy, Moody’s also expects rent growth to pull back, but the current outlook still has rents rising between 4% and 5% in 2023.
Aurora-Central-Southeast submarket is Denver's weakest
Some submarkets are lagging generally strong metro performance. The Aurora-Central-Southeast area saw effective rents grow just 1.6% in the third quarter, making it the laggard for the metro. The submarket also saw a 70 basis point vacancy jump in the same period. While its vacancy level of 3.3% seems tight, it is actually the highest vacancy rate this submarket has recorded since mid-2015.
Market’s recent strength could ease recession impact
With expectations of a recession occurring in 2023 gaining greater prominence, the Denver apartment market will likely not be immune to any slowdown in economic activity. But still, it will enter any downturn in a position of relative strength given how well performance metrics have turned out over 2021 and 2022.
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