Denver Apartment Rents Drop (Denver Post)

[Matthew Schroeder]

The most recent quarterly data from to the Apartment Association of Metro Denver (AAMD) shows that the Denver rental market is cooling off (see link to article below).

Average apartment rents in metro Denver fell for the second quarter in a row in the fourth quarter of 2016 as the market struggled to absorb a record number of new units.

Average apartment rents fell from $1,371 in the third quarter to $1,347 in the fourth quarter, marking the largest quarterly drop in the 36 years the report has been conducted. Median rents stayed flat at $1,329 per unit.

Apartment vacancy rates shot up from 5.1 percent to 6.2 percent.

Metro Denver Apartment Rents Drop (Denver Post)

[John Riggs]

Scott Trench Bill S. what do you guys think about this? Seems contrary to the hype, right?

[Brett Caron]

I visited Denver in February and I have to say, I've never seen so many condos and town homes being built at a time. It can't be sustainable. There were a few really large areas on the east side of the city that were just speed built neighborhoods.

[Bill S.]

@John Riggs all real estate is local. This is not surprising for me nor should it be to anyone else watching the market. It's not really contrary to the hype. As I've stated before. If you have a luxury condo in downtown you should expect significant pressure on rents. If you have units renting below $2000 per month then probably not so much. Previously (late 2015 or early 2016) AAMD published a vacancy rate of something like 12% for luxury units in the urban core. I can only imagine this is getting worse. The numbers sited in the article support that premise. Average rents are falling while median remain constant. This shows the "below average" prices are continuing to increase while more units are added to the top end and rents are falling in the top end. What remains to be seen is the impact from trickle down. 

So what happens to the market when some of those older As fall to Bs and Bs to Cs? IMO we are going to see low end rent growth level off this year and high end rents decrease. We should still see price increase in purchase properties for the next few years*. As housing prices continue to increase and rents remain flat that will keep some buyers out of the market. I still see very short supply in the below median priced homes and rentals for the foreseeable future. The bottom line is that there is no supply being added on that end (the cost to build is greater than the media rent or home sale price will support in most cases). 

*Now all of this could change if the construction defect law changes. All of those overpriced rental units become for sale and the supply tips back in line with demand. You would see a cooling of the home price increase and those dated condos selling for $300k might see a significant dip in value.

Keep an eye on the numbers. 

[Scott Trench]

@John Riggs I agree with @Bill S. - Rents in LoDo have been flat or falling for almost a year. Other parts of the city continue to see rapid growth. I think personally that it is a pretty lousy time to be buying 500 unit brand new apartment complexes in the downtown area as there is just so much competition. Unfortunately for me, I am not in position to buy $50M apartment complexes, so the problem of high-end luxury LoDo rents falling is not very applicable.

It's no secret if you walk or drive around the city that thousands and thousands of high-end apartment units are under construction. It's also clear that affordable housing and low-end stuff is not being constructed. I think that if your property has it's own yard, and is renting for $1100-$1500 per month, you are probably ok, and that's the type of property I plan to keep on buying. If the market flattens out, we can cash flow, if it continues to climb, we can benefit from more appreciation, and if it collapses and rents fall by 25% or so, we can survive with a little sweat and a hefty reserve and find ways to buy at the bottom.

As always, your plan should allow you to win if the market keeps climbing, allow you to win if the market stays flat, and allow you to win if the market declines/collapses. 

[Russell Brazil]

Question: It says rents fell in the 4th quarter.....is that historically common place? In many metro areas rents fall in the 4th quarter and rise in other quarters. People tend to not move during the holidays, so landlords who have vacancies then drop their rents.

[Bill S.]

@Russell Brazil the seasonal fluctuation in rents is a pattern and this seems to be beyond that. For the past 5-8 years the 4th quarter typically was flat or slightly up in average rent. In addition, the dip in the average rent was the largest amount recorded in the 30 yr history of the survey. They didn't elaborate as to how it compares percentage wise. The drop was less than 2%. Going from memory the peak to valley drop was maybe 10%, total during past periods of rent contraction. Again these are averages and something not mentioned was concessions. I have heard of two months free rent but have not independently verified this. During slow times, it's not the drop in rents that gets you it's the vacancy and concessions. Rents stay the same but if you sit empty for 1 month and then have to give away the rest of the next month in free rent. You just took a 15% reduction in net rent. Those are the numbers that hurt. Add another month to that and Scott's 25% drop isn't so far off. Going forward management will be the difference between success and failure at the top end for sure and possibly trickling down to us bottom feeders.

@Scott Trench I agree with you about the quality of the market segment you are targeting and at the same time be very careful with the thinking that a blood bath in high end rentals will not impact the lower end properties. It will, I'm just not sure how or how much. Based on what you have said, you are prepared so that is good.

We should form a hedge fund to buy one or more of those nice new complexes that falls on hard times due to management and forthcoming interest rate increases.  Deals are so thin that people are using short term low cost money. That is going away as well. It won't be pretty when the balloon payments are due, rents are down and vacancies are up from what was in the optimistic proforma. 

[Billie Miller]

@Bill S. I love your hedge fund idea! We only own a duplex in Denver right now but plan on keeping some cash around over the next couple years to snatch up some properties after the next correction.

[Bill S.]

@Billie Miller I don't see the prices of anything but apartment buildings taking a huge hit in the near future. Not sure your duplex will throw off enough cash to buy a distressed 300 unit complex :(. I would say, having cash is not a bad idea though. 

[Billie Miller]

@Bill S. Baha! Well you never know!!! JK, it definitely won't. Something to keep in the back of your mind tho!

[Chris M.]

I find this post very interesting because here in Portland OR the market seems to be cooling as well. It's clear people are having more trouble selling their homes and prices keep getting slashed. Like you guys said it's often local, but I've heard a lot of talk of markets "cooling" lately. Perhaps a dip in the market is coming. 

@Matthew Schroeder do you need a real estate license to access the AAMD data? I'm interested in accessing similar here in Portland.

Just wanted to chime in, thanks for the interesting post!

[Bill S.]

@Chris M. is a membership thing ($$). Here's the link. There is a one time fee for the last quarter or annual fee with quarterly updates.

[Derrick Aragon]

The big hit will be in the back end cap rates... As all this product tries to find an end buyer that is how the top of the rental market will affect the lower or mid-apartment..

Most of these developers or syndicators can not pull off long term financing so they have to sell so they will do anything to get people in the door at the right price to sell at 5-6 cap..

 When the balloon as stated earlier is near they will bend and take 6.5 or 7 or whatever clears them out of the property.