Supply and Demand are out of Balance
Central Denver Apartment Market Report: Cover page of our 2017 Q4 newsletter
Prices continue to climb in the Central Denver apartment market. Another record was set in 2017, as the average sales price surpassed $185,000 per unit. This is the sixth year in a row that a new record was established. High rents, low vacancy and low interest rates helped push the market to new heights during the year. And despite slight increases in vacancy and interest rates late in 2017, prices continued to climb. Perhaps the main driver was Supply vs Demand.
Solid operating and financial metrics continue to fuel strong buyer demand for properties. Despite record-high prices, the reluctance of owners to sell has led to a shortage of available buildings on the market. The “supply” is not meeting the demand.
We saw the inventory of available properties for sale fall dramatically last summer/fall. The impact has been that motivated investors are continually bidding up the price for the properties that are listed for sale. Not only are prices high; when buildings hit the market, they usually go under contract quickly.
Supply is so restricted, that despite healthy market fundamentals, we saw the fewest number of transactions in Central Denver in seven years. There were only 33 sales of larger apartment buildings (10 or more units in size) across these neighborhoods in 2017. Central Denver has not experienced such a low volume of sales since the aftermath of the 2008 financial crisis.
This competitive market has led some investors to pursue “off-market” transactions. Frustrated by the lack of available listings, they are asking brokers to make direct, off-market offers for attractive buildings. While this can be an effective strategy for buyers, the seller never really knows how much money was left on the table because they did not use a broker to list and widely market their property.
We continue to closely watch the vacancy reports. High levels of construction (13,348 units completed in 2017) are pushing the over-all vacancy rates higher, but so far it has had minimal impact on existing Central Denver buildings. In the 4th Quarter vacancy report released in January by the Apartment Association of Metro Denver and the University of Denver, the metro-wide vacancy rate was 6.4%. In Central Denver, a staggering 8.3% vacancy rate was reported. However, within the details of the report, we found the vacancy rate for buildings between 9-50 units (a category too small to include the large new construction projects) was only 3.6%. So far, high vacancy has been limited to the new projects trying to complete their initial lease-up.
Looking ahead into 2018, there are several dynamics that could affect the speed and strength of our market. In late 2017 we saw another uptick in interest rates, and an increase in vacancy rates. How these two key factors trend in 2018 will be key determinants to our market this year. We are available to discuss the Denver market with you anytime. Please don’t hesitate to call!
by Greg Johnson