November 15, 2024

Multifamily Vacancy Inches Lower as Net Absorption Spikes in Denver

Q3 2024

Operating conditions in the Denver multifamily market continued to perform well during the third quarter. Net absorption has been robust, as apartments in Denver recorded net move-ins for approximately 5,300 units during the third quarter, a peak in the past decade. Elevated levels of renter demand have led to some modest vacancy tightening in recent months. For the first time in roughly two years, area vacancy trended lower in a 12-month period. The recent increase in demand is coinciding with elevated levels of supply growth, as projects totaling approximately 17,400 units have been delivered thus far in 2024, already reaching a cyclical high for the region. While multifamily deliveries have been rapid, construction starts have slowed in recent periods. For the first time since the end of 2021, the development pipeline is below 35,000 units.

Sales volume in the Denver area to this point in 2024 is closely tracking 2023 levels and lagging the region’s historical totals from the prior decade. Activity to this point in the year has been concentrated south of Interstate 70 in areas such as Aurora and Lakewood. Sales in the Aurora submarket have totaled nearly 25 percent of total transactions for the region this year, while the Lakewood/West Corridor area has accounted for another 20 percent of the transaction mix. These areas have been leading sources of investment volumes since 2018. Cap rates appeared to compress somewhat in the third quarter, but this was largely a result of a mix of high-quality performing assets changing hands. The low-end of the cap rate range remained fairly steady, but there were far fewer properties selling with cap rates higher than 5.5 percent.

Looking ahead

This year will be a period of elevated supply growth and continued renter demand for units in the Denver multifamily market. It may also represent a slight change in direction in the market’s supply-side pressures. While exact timelines are subject to changes, the highest quarterly total of new deliveries likely occurred in the second quarter of this year, and the pace of deliveries is expected to taper off in the coming quarters. The market has proven resilient enough to absorb a high volume of new units coming online while maintaining steady vacancy levels and posting modest rent increases. Vacancy is expected to inch higher in the fourth quarter but should remain close to the region’s long-term average. Additionally, employment growth is expected to rebound in the coming quarters, as Denver’s rapidly growing population is forecast to support new job growth and continued household formation.

Sales activity in the Denver multifamily investment market may pick up through the end of the year, with total transactions in 2024 on pace to exceed levels recorded last year, while still coming in well below historical volumes. In recent transactions, investors have shown a preference for Class B properties. The transactions that have occurred involve low-vacancy Class B properties, as investors target buildings that will be less impacted as newer, more expensive units come online. This trend will likely continue as the development pipeline thins. With the transaction mix currently consisting of some of the market’s top performing properties, the range of cap rates has tightened, with the top-end of the range ticking lower. As long as these types of assets continue to make up the bulk of the trades, cap rates are likely to remain near their current ranges. Historically, a more diverse mix of properties has sold, a trend that will likely repeat as market supply and demand conditions stabilize.