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Is the Denver Rental Market Going to Bust? Statistics and Other Important Information For Your Investment Property.
By Colorado & Company General - December 11, 2018
December 2018 Update from Colorado and Company
With 2019 right around the corner, we have put together the following update for all our treasured clients and acquaintances at Colorado and Company.
The rental market has been shifting and we want to make sure you have the necessary information to make the best decision for you and your clients.
For starters, it is no surprise we have a healthy employment growth in Metro Denver. Per Metro Denver’s Economic update in August of 2018, As of July 2018, Metro Denver’s year-to-date employment had increased 2.6 % compared to 1.9% last year and Colorado is on track to rank 5th for employment growth in the Nation. Employment growth along with an amazing quality of life has resulted in Metro Denver’s population to continue to grow on average of 1.7% year over the past 10 years. That is 50,000 net new people each year.
Despite the continued increase of population rental rates are on the decline for the year and vacancy rates are on the rise, resulting in investors finding it to take longer to find qualified renters and for lower rental rates
What is causing this counter-intuitive decline?
We think it is due to overbuilding of apartment buildings along with an increase of privately owned investment properties. That being said, there is a major apartment building boom in Denver, making this increase in apartment buildings the second largest in the U.S., per capita.
Statistics supporting our assessment:
- Denver is 2nd Largest in Apartment building construction, per capita in the U.S.
- In 2017, 13,348 apartments came onto the market
- In 2018, the first three quarters delivered 8,448 units in the Denver metro area. There is a delay due to construction backups.
- In 2019, projections call for 30,000 apartments over the next 30 months.
- 33% of apartments communities are high-end buildings.
- 1 out of 7 downtown units come with the concession of one-month free rent
- Average apartment and privately owned rental rates have decreased the 3rd Quarter
To clarify, we do not think we are in “doom and gloom” recession. The rental market is just softening and becoming far more balanced. Properties are still appreciating in value at a very healthy level. However, the “glory days” of Landlords leasing properties in a few days without much effort to highly qualified renters, and increasing their rental rates 10% year-over-year may be over.
In today’s softer market Landlords must be strategic in avoiding vacancy loss, which can be much more expensive than a price drop. We recommend that owners, especially in direct competition with the apartment buildings, to market their properties at very competitive rental rates and be more flexible and open tolease terms lengths, furnishings and pet conditions.
The shift in the market also means it has become more important than ever to hire an experienced and effective leasing agent. The days of throwing up a property on Zillow and Craigslist and receiving a flood of interest and qualified tenant right away are over. It takes an expert assessment and securing an effective rental rate along with the proper presentation of the property online to find the best-qualified tenants as quickly as possible.
Why should you continue to use Colorado & Company?
Since 2016, rental inventory in MLS has nearly doubled. We, Colorado and Company (COCO), have leased 68 properties in the second quarter of 2018, and 200+ year to date, which is almost twice as many as our nearest competitor. As a result, COCO holds 16% of the overall market, the same percentage since 2016, while competing brokerages occupy 3% or less of the market. Inventory input is trending upwards, showing that more owners are using an agent to list their property and input into MLS.
Now, let’s talk average and median rental rates. In the third quarter, the average rental rate was $2,500/month, which is $100 less than in the second quarter. This is a 4% seasonal decline. The average rental rate is down $67 from the third quarter in 2017 to the third quarter in 2018, which is a 3% market decline. The second and third quarter market median rental rates for 2018 were $2,300, which remains consistent with 2016 and 2017 stats. Finally, our company’s median rental rate in the second quarter was $3,050, which is 33% over the market and an increase of 17% from the second quarter of 2017. Thus, our company consistently acquires much higher median rents.
The Luxury Market
In the luxury market during the third quarter, the average cost per square foot for all of MLS is $1.5. The price per bedroom in Denver for an attached property is $1,723 and for a detached property is $1,117. However, in areas outside of Central Denver like Aurora, Castle Rock, Lakewood, and Morrison, the price per bedroom is anywhere between $680 and $760. And who dominates the luxury $5000+ market? COCO remains on top with 44% of the listings in the second quarter of 2018.
As for days on the market, COCO’s average in the third quarter of 2018 was 27 days, compared to the market average of 35 days. Currently Arvada, Centennial, and Boulder have the lowest days on the market, with 15 to 20 days (NOTE: this is DOM until a fully executed lease, not possession). Because of these patterns, we always recommend listing 60 days prior to when you wish to fill a vacancy!
Overall, properties are leasing for less than their list price and agents are more likely to get listed rental rates in the second quarter than in the third or fourth. Also, the highest list prices are consistent in May, which indicates a good time to lease. On the other hand, list-price drops tend to occur in November and February. In February 2018, we saw a huge drop and we expect to see the same in February 2019 as well, so, try to avoid listing during the winter. Overall, if you want to get full price and a higher rent per square foot, the second quarter, and specifically May, is the prime time to release your property.
Where to and not to invest
Investing in townhomes in millennial-friendly neighborhoods like LoHi and RiNo lease up quickly as long as they are priced well and don’t have funky features. Family-friendly locations like Arvada, Centennial, and Boulder have the lowest days on the market. Also, Boulder currently enjoys the second highest average apartment rents.
As of now, avoid Cherry Creek and the Golden Triangle, because the Apartment Association and COCO are seeing the largest decline in rents in these areas. As noted earlier, luxury apartments and condos are hurting the most; it’s smart to avoid those as well. Luxury apartments and condos are also struggling because they tend to compete directly with overbuilt apartment communities, which offers concessions compared to homes or townhomes and thus provides them with more benefits.
It may be a given, but features such as backyards, dog- friendly, good surrounding schools, parking spaces, walkability washer/drying in unit, views, and rooftop decks all make up qualities that tenants seek in properties. As for features that are unappealing, the lack of dishwasher, no pets, no parking, shared or community washer/dryers, clawfoot tubs, lack of air conditioning, and dated finishes or furnishings all have the potential of turning tenants away.
Our Final Thoughts
Before you go, a few important takeaways for all of our readers! The apartment building boom in Denver has caused rental rates to decline and vacancy rates to increase, which is a drastic change from what many investors have experienced in the most recent past. However, people are still moving to Denver and they are filling well priced and located properties. The leasing market isn’t crashing, it is just becoming more balanced. For 2019, we recommend that Landlords keep quality tenants if they are already in place, to be competitive in pricing and terms to compete with the Apartment Buildings and to stay optimistic. We know this market shift can be very frustrating for owners and hard to swallow after such a great rental market for so many years. However the market is still good compared to many cities, properties are still appreciating well, the rental market isn’t crashing, just balancing out, and our Economy is still healthy!
Many thanks to our clients, friends and referral sources! We are so grateful for your loyalty and humbled by your trust and support. Our success wouldn’t be where it is today without you. We strive to continue our excellence with care and execution that so many have come to count on as the leaders in the market.