As rents drop, slowing construction is a concern

The average rent in the Denver area ticked down a shade in recent months, but market watchers are sounding the alarm that declining construction activity could upend the market and send prices skyward again.

Renters in the Denver metro shelled out an average of $1,506 monthly for their places monthly during the third quarter, according to the Denver Metro Apartment Vacancy and Rent survey from the Apartment Association of Metro Denver. That’s a 1.4% drop from the $1,528 average that the survey recorded in the second quarter.

Over the past 12 months, metro rents have risen 2.8%, just a hair above the 2.7% rate of inflation for the region over that time, according to the apartment association’s research. Vacancy, meanwhile, fell to 4.7% in the third quarter of 2019, the lowest rate since the middle of 2015.

Terrance Hunt, vice chairman of Newmark Knight Frank Multifamily’s Denver office, said in a statement Wednesday that permits for new projects have fallen 24% in the past year. That decrease in permitting comes as the market hits a three-year low for new apartments completed. Over the past 12 months, 10,341 new units have hit the market.

“The stability of rents going forward will be dependent on there being an abundant supply of housing stock to keep pace with the region’s growth,” Mark Williams, executive vice president of the Apartment Association of Metro Denver, said in a statement.

According to data from Denver-based

Apartment Appraisers & Consultants, there are 25,800 apartments currently under construction in the Denver area. Another 32,700 are in the planning stages.

Teo Nicolais, an instructor at Harvard Extension School specializing in real estate, notes that only about 50% of planned units in a given year ever get built. From Nicolais’ perspective, Denver is a victim of its own success. Construction costs have risen from $150 per square foot in 2015 to roughly $250 per square foot in 2018, according to data from Apartment Appraisers & Consultants. When you mix skyrocketing costs with stabilizing rents, many developers may choose to sit on the sidelines instead of building.

“This is a worrying trend we’ve seen this quarter,” Nicolais said, “and if it persists then we will likely see more upward pressure on rents.”