Rents decline for second consecutive quarter as vacancy increases continue six-year streak
Average rents declined to $1,456 and average vacancy increased to 5.8% in the Denver metro area during the fourth quarter of 2018 according to the Denver Metro Area Apartment Vacancy and Rent survey.
The construction of 12,324 new apartments in 2018 – a volume nearly three times greater than Denver’s long-run average construction levels – was a key factor in the easing of the rental market.
“Due to a surplus of available apartments, average rents declined for the second quarter in a row and ended at $1,456 for 2018,” said Mark Williams, Executive Vice President of the Apartment Association of Metro Denver. “This signals a leveling off of the rental market, which should provide some relief to rental seekers in the Denver metro market.”
Rents peaked at $1,484 in the second quarter of 2018 before falling to $1,465 in the third quarter and declining to $1,456 in the fourth quarter. The cumulative $28 decrease in average rents represents a drop of 1.9% over the past six months.
“After adjusting for inflation average rents have fallen by 2.4% over the last six months,” said Williams. “This means that rents are becoming more affordable for renters.”
The Consumer Price Index for the Western Region, which measures the cost of goods and services purchased by typical consumers, increased by 0.5% during the second half of 2018.
Experts attribute the decrease in average rents to steadily increasing vacancy rates throughout the Denver market.
The metro area’s vacancy rate increased to 5.8% at the end of 2018, up from 5.5% the previous quarter. According to the report, the Denver metro area had an estimated 20,237 vacant apartments at the end of the fourth quarter.
The apartment market reached another milestone in 2018 in the continued march toward a balance between supply and demand as Denver’s vacancy rate moved towards its long-run average.
“2018’s average vacancy rate of 5.9% marked the sixth consecutive year of increasing average annual vacancy rates,” said Teo Nicolais, an Instructor at Harvard Extension School who specializes in real estate. “Currently, the Denver market is less than 1.0% away from its long-run average vacancy rate of 6.8%.”
The average annual vacancy rate most recently bottomed out at 4.6% in 2013 and has been increasing ever since. The last time Denver’s average annual vacancy rate hit 5.9% was in 2010.
Seasonality and a surge in construction contributed to the increase in vacancy. An increase in the number of vacant apartments in the city puts downward pressure on rents.
“Vacancy usually ticks up in the fourth quarter,” said Williams, “Average vacancy increased during the fourth quarter in 33 of the last 38 years; however, that hasn’t always translated into decreasing rents.”
Williams noted that average rents declined during the fourth quarter in only 15 out of the last 38 years.
A key factor to this year’s decrease: new construction.
"In the fourth quarter of 2018, 3,876 new apartment homes were delivered, which is the third-fastest pace of construction in over three decades,” said Nicolais.
The report, which tracks construction activity going back to 1988, found higher deliveries only in the second quarter of 2002 and the third quarter of 2017 which saw new construction of 4,384 and 4,315 units, respectively. According to the report, the late surge in deliveries pushed the total number of apartments built in 2018 to 12,324.
“That’s slightly lower than 2017's record setting construction of 13,348 new units, but it’s nearly three times higher than the 30-year average annual pace of 4,534 new apartments per year,” said Nicolais. “Building at three times the long-run average pace significantly increases the likelihood of oversupplying the market. Oversupply puts downward pressure on rents.”
According to the report, 50,793 new apartments have been built in the metro area over the past five years.
A submarket-by-submarket breakdown shows a wide range of rents in the metro area.
The Denver’s City Park became the metro area’s most expensive submarket with average rents of $1,918 followed by Downtown Denver at $1,853 and Northwest Denver at $1,778 per month.
The lowest average rents in the metro area were once again found in Wheat Ridge at $1,133 followed by Denver South Central at $1,198 and Aurora Central North-East with average rents of $1,237.
Across the Denver metro area, the age of the building played a significant role in determining the average rents.
“As expected, apartment built in 2010 or later topped the list with average rents of $1,796. Apartments built in the 1970’s rented for an average of $1,172 or 35% less than apartments built in this decade,” said Williams. “If renters are looking for less expensive rental prices, buildings built in the 1970s would be an ideal place to start.”
The Denver Metro Area Apartment Vacancy and Rent Report is coordinated and published by the Apartment Association of Metro Denver. The survey is conducted by the University of Denver’s Daniels College of Business and Colorado Economic and Management Associates, and sponsored by The Colorado Department of Housing.