January 2023 Multifamily Market Report
Multifamily is expected to be the most popular investment in 2023 as demand remains present and the sector serves as a great inflationary hedge. Although fundamentals have cooled since the beginning of 2022, investors are still planting capital into the sector with $5.8 billion in sales volume over the past 12-month period. This is still above the historical 12-month rolling average of $3 billion, but less than the peak occurring from Q2 2021 to Q1 2022 where sales volume reached $10.9 billion over a 12-month period. The absorption slowdown coincides with an increased building pipeline, setting Denver up for a record number of units currently under construction. Denver’s apartment delivery timeline is expected to return vacancies to pre-pandemic levels in the following quarters.
- A record-breaking 26,000 units are under construction in Denver, increasing inventory by 9.5%.
- Average rent levels in the region have reached $1,779/month.
- As of July 1, 2022, the Denver City Council passed an affordable housing policy which requires new housing developments of 10 units or more to
set aside between 8 and 15 percent of units as affordable. Additionally, the city will be increasing its linkage fee over the next 4 years. Developers who provide affordable housing are exempt from this fee.
Rents | Vacancy | Construction
Vacancies in the market are high, currently sitting at 7.7 percent and are projected to reach nine percent within the next two years due to the development pipeline in 2023. The vacancy rate is set to return to pre-pandemic levels by 2024. With the introduction of construction restrictions and affordable unit guidelines, development plans increased by nearly 400 percent ahead of the June 30th deadline in 2022 as developers raced to submit plans before they were submit to the new law, according to CoStar Group. Opponents of these measures are concerned that it could lead to a decline in future deliveries as developers shift focus to markets with fewer restrictions. For now, development is projected to remain historically high as a record number of approximately 26,000 apartments are under development. More than 90 percent of units added in the last decade were in high-end, four- and five-star communities. The average rent in the metro is $1,780 per month, after rising by 2.8 percent in the last year. Rent growth should continue to moderate from the highs recorded these past 12 months.
Investors have not steered away from investing in multifamily, with $5.8 billion in sales volume recorded over the past 12 months. The fierce competition for multifamily assets in Denver has resulted in significant market price appreciation. The average market price per unit has climbed to $320,000/unit. Concerns about rising interest rates and the the possibility of a recession may dampen investment enthusiasm. As investors flood into the area, cap rates have tightened, making it more difficult for investors to seek yield. Currently cap rates sit at 4.6 percent.
Cap rates have been lower than the national average during this past year but remain higher than significant coastal markets such as New York and Chicago.