Among the locales that should benefit from expansion of Denver‘s light rail system are the Stapleton and Fitzsimons areas. Located east of downtown on the 7.5-square-mile former site of Denver Stapleton International Airport, Stapleton is one of the country’s most notable live/work/play communities. Opened in 2002, Stapleton already is home to about 7,000 people. The project ultimately will feature roughly 12,000 residential units, some 3 million square feet of retail space, and about 10 million square feet of office space. Fitzsimons, found just east of Stapleton, is the redevelopment of the former Fitzsimons Army Medical Center into a 579-acre campus of hospitals and bioresearch labs. Employment at Fitzsimons is closing in on 13,000 people, and the count should climb to about 30,000 people over the next decade or so.
While urban core housing and transit-oriented development in Denver offer some clear opportunities, many traditional suburban properties are continuing to struggle. Indeed, recovery for the overall market remains a work in progress, after a huge wave of new supply came on stream just as the economy went into recession earlier in the decade. Occupancy has improved nearly five points from its mid-2003 bottom, but the rate of 94.2 percent seen at the end of 2006 still falls below the national norm and, furthermore, ranks as the weakest performance recorded across the West region of the country.
And occupancy is actually the good part of the performance story, since the rent production stats are even more troublesome. In dramatic contrast to average rent growth that topped 5 percent for major metros in the West during calendar 2006, effective rents in Denver inched up a mere 0.8 percent. Today’s average monthly rent of $779 is still more than 7 percent below the peak level seen six years ago in the middle of 2001. The fact that rents haven’t gone up as occupancy has improved in Denver is a little surprising, since the area does have a big premium to buy versus rent housing. The median single-family home price registered around $250,000 in late 2006, according to the National Association of Realtors.
Hurting the metro’s rent positioning, Denver has reigned as the country’s rent giveaway king throughout recent years. While the share of properties featuring concessions has come down from its most extreme level, discounts still were offered for 55 percent of the stock surveyed by M/PF YieldStar in late 2006. Furthermore, the specials aren’t minor enticements in Denver: The average concession as of the fourth quarter of 2006 was a 15 percent discount, or nearly two months of free rent.
Among the key neighborhood-level apartment performance trends seen recently in Denver, the urban core registered fairly healthy occupancy of 95.7 percent at the end of 2006, despite adding the biggest portion of the metro’s new supply in 2005 and 2006. And the area in and around downtown was the region’s runaway rent growth leader, as effective rents jumped nearly 8 percent. Nearly all of this rent inflation registered in older properties, whereas rates were flat in the top-tier stock that had to contend with competition from recent deliveries in initial lease-up. Boulder County also did comparatively well in calendar 2006, posting December occupancy right at the 96 percent mark and annual rent growth a little above 2 percent.
Looking ahead for metro Denver, the key number to watch is that rent growth figure. With rents so clearly under-positioned and occupancy now moving into a zone that’s at least reasonably healthy, the metro is overdue for a rent correction. It wouldn’t be surprising to see rental rates spike in 2007 and 2008, as long as occupancy continues to improve modestly. Once rents reach firmer ground, building will probably surge. Since Denver has looked ready to make a big move for at least a couple of years, developers are lying in wait, all set to go once achievable rents reach levels high enough to justify construction of more than just a few niche properties. While a big part of today’s story in Denver is how little new construction is occurring, the key plot a year or two from now could focus on the return of an aggressive building pace.
Greg Willett is vice president of research and analysis at MPF YieldStar.