August 7, 2024

Strong multifamily absorption in Denver supporting rent growth and stable vacancy

Renter demand remained elevated in the Denver multifamily market during the second quarter, leading to vacancy improvement and rent increases despite strong levels of supply growth in the past six months. Net absorption in the region topped 3,500 units in the second quarter, the highest quarterly total since renter demand peaked in 2021. Through the first half of the year, absorption is up more than 50 percent when compared to the total from the same period in 2023. Projects totaling more than 7,500 units came online in the second quarter, a faster pace of deliveries than has been recorded in recent periods. Still, vacancy levels have remained mostly steady since the end of 2022, with the rate in stabilized properties hovering between roughly 5.4 percent and 6 percent during that time.

Sales activity in the Denver multifamily market dipped in recent months; however, the total number of property sales during the first half of this year is nearly identical to the transaction counts from one year earlier. While much of the activity in 2023 was concentrated in Class A and Class B assets, properties across the quality spectrum have changed hands thus far in 2024, with Class B properties trading most frequently. Reflecting this change in sales mix, prices have trended lower. That said, softening prices were recorded in Class B properties, where the median price through the first half was $256,700 per unit, 23 percent lower than in 2023.

Looking ahead

The pace of deliveries in the Denver multifamily market is expected to remain elevated through the end of the year, and these supply-side pressures will likely impact market fundamentals. Projects totaling roughly 20,000 units are forecast to come online in 2024, nearly doubling the region’s annual average over the past decade. Elevated supply growth could create competitive pressures on operators, despite persistent renter demand for units. The local labor market should provide some support in the second half, after somewhat sluggish hiring conditions have dragged on the local economy in recent months, particularly sectors including warehousing and logistics and construction. While demand is not expected to fully keep pace with supply growth, there should be enough leasing momentum to allow for modest rent growth through the remainder of this year.

The multifamily investment market may begin to regain some momentum in the coming months after a slow second quarter. Assuming interest rates decline, sales velocity is poised to tick higher through the end of the year, tracking trends recorded last year, and transaction volume in 2024 is expected to be similar to levels posted in 2023. While recent transactions have influenced price and cap rate data points, the wider mix of properties changing hands is leading to some greater price discovery in the market. Potential buyers and sellers should have greater clarity on the pricing and cap rates necessary for deals to close. With cap rates between 5.25 percent and 6 percent – higher than in recent years – more deals may pencil, moving some buyers off of the sidelines.

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