This quarter we continue to look at the dynamics behind the market cycle for apartments in the Denver Metro Area. When the public sees more buildings being built, they often times wonder if there are too many new units and ask “who will rent them all?” The graph that follows shows the new units created and the vacancy rate on a quarterly basis from 2003 to present.
There are a couple of phenomena that need to be identified and explained. First, in 2003 the vacancy rate was 13.1% as new units were added late in the market cycle. For the next four years the vacancy rate decreased as units available were absorbed and new unit production remained low. We then saw a classic real estate cycle phenomena of new construction starting as we entered the “great recession”. Because of a loss of jobs and households, the vacancy rate increased as these new units were added to the market. Since 2009 the apartment market has recovered, as the vacancy rate decreased, and eventually the market responded with new units being built. The vacancy rate trended down to a low of 3.9% in 2014 and has moved up some since then, but not as drastically as many people had feared from the new construction.
We are now having a record year for the absorption of new units added, which may be counter intuitive to some people. Why hasn’t the traditional cycle of overbuilding and vacancy increasing happened yet? The traditional cycle hasn’t appeared because the dynamics of household formation and in-migration have changed since the “great recession”.
The Denver apartment market dynamics will likely change again in the forthcoming years. The question is whether the supply of new units completed will surpass the demand from in-migration and the in-state household formations. History tells us job creation is a measurement to monitor for “derived demand” for housing including apartments. The real question for the future is whether employment expansion will create enough apartment unit demand through new household formation.