What is Your Market Forecast for 2007?

By Doug Andrews
Apartment Realty Advisors

The Denver apartment market backslid a bit in the fourth quarter of 2006 and vacancy crept up to 7.0% from 6.3% in September. Absorption (the gain in occupied apartments) for the year was only 2,709 units, the lowest total since 2002. This is shocking, considering that market fundamentals all pointed to stronger occupancy. Job growth was stronger in 2006 with 49,897 jobs added, compared to 20,969 in 2005, according to the Bureau of Labor Statistics. Population growth remained strong at 1.65%. Interest rates increased, causing fewer renters to buy homes; and new home and condominium sales dropped precipitously.

Denver now has the highest foreclosure rate in the nation, due to high home prices, "no down payment" transactions and the highest ratio of adjustable rate mortgages in the country. In 2006, there were 19,425 foreclosures in metro Denver. Our population growth indicates that foreclosed families didn't leave town, and we know they didn't rent apartments, so where did they go? Many of the younger victims have moved back with their parents, but most families who lost their home have simply rented the foreclosed house next door. With the mass of foreclosures and a very soft condo sale market, there is now a significant "shadow market" of rentals in Denver. This represents considerable pent-up demand for apartments. As lenders and investors sell foreclosed homes and condos to consumers, many families will have no option but to rent apartments. After all, they can't get a new mortgage for seven years.

Even with low absorption, apartment vacancy dropped in 2006 to 7.0% because only 738 new units were built. Developers are now looking for sites, but good locations that can be built out at a reasonable cost are rare. The pipeline of new developments remains thin. We expect 1,450 deliveries of new units in 2007, based on 2006 permit total of only 1,200 units. Permits will increase in 2007 but only to about 1,500 units because of the challenges developers now face.

Real rents (after concessions) clearly began a strong recovery in 2006. Rental discounts decreased to 15.3%, the largest drop since this concessionary cycle began. Concessions are now back down to the level of three years ago after peaking at over 17%. Most owners raised rents last year but we find that they fall into two groups: those with disappointing 2-4% rent increases and those with 10-15%. The latter group typically focused more on rent than occupancy. With a vacancy similar to Phoenix, why does Denver still have nearly two months of concessions (on a one year lease) while Phoenix, with similar vacancy, has none? Owners do not need to wait until the market is fully occupied to raise rents. The market is strong enough to cut concessions now.