Believe it or not, apartment rents in metro Denver once were much more affordable than the country as a whole, until this decade, when that advantage disappeared.
Since the start of 2010, metro Denver apartment rents have risen at the fourth fastest pace in the country, pushing the region’s rents from 17 percent below the U.S. average to 8 percent above, according to RealPage, a real estate software firm based in Richardson, Texas.
Only San Jose, Oakland and San Francisco in northern California have seen their rents rise faster than metro Denver, which now ranks as the 17th most expensive out of the 50 largest apartment markets in the country.
The biggest increases in rents this decade locally have come in the suburbs, places like Thornton, Aurora and Wheat Ridge, not in Downtown Denver, Cherry Creek or the Highlands, neighborhoods where new luxury projects have popped up left and right.
“There’s a strong relationship between rent growth and construction activity, since delivery of new supply tends to dampen the ability to raise pricing,” said Greg Willett, chief economist at RealPage.
The median rent in metro Denver, including the incentives offered by landlords, was $805 in the first quarter of 2010, according to RealPage. By the end of last year, it had risen to $1,462, an increase of 82 percent.
In the submarket that encompasses Downtown, Highlands Ranch and Lincoln Park, rents went from $1,165 to $1,911 this decade, an increase of 64 percent. Contrast that with the north Lakewood and Wheat Ridge submarket, where rents nearly doubled from $696 to $1,380.
RealPage found that Class A, the shiny new stuff, and Class B, the late-model units still in good shape, saw similar rent increases this decade. Class C space, older properties without amenities, actually saw the smallest gains in rents.
Teo Nicolais, an instructor at Harvard Extension School who specializes in real estate, argues all the new supply is pushing older buildings down the value chain. The high-end luxury units are turning yesterday’s Class A properties into Class B. And Class B units are becoming Class C, making it harder for them to pass on big rent increases.
Willett offered another explanation. Landlords who rent to tenants in the lowest income brackets are limited in what they can charge for rent. Although a larger share of renters are now in higher income brackets, they aren’t interested in that part of the market.
Nicolais said the fact that Class C rents are rising at a slower pace than other units is a positive for the market. The key is making sure more affordable units are kept up so they don’t deteriorate into Class D, blighted properties, or get scraped to make way for luxury units.
“We are seeing the gradual accumulation of affordable housing,” he said.
But even in Class C, rent gains have outstripped income gains. Developers need to add more affordable units and to build more in the suburban areas that they have neglected.
Nicolais said it is important to keep a long-term view. From 2000-10, rents in metro Denver were flat. And the gains this decade have been fairly lumpy. He said metro rents in 2014 were rising at 11 percent a year. That gain is now closer to 0.4 percent.
The difference is all about adding new supply, Nicolais said. From 2010-13, developers added 9,229 apartments in metro Denver, while from 2014-18, they added 43,205.
That new supply is what has pushed down rent increases. It has also become a hot topic in the mayoral race in Denver, where challengers to Mayor Michael Hancock have proposed a construction moratorium.
Does metro Denver face added risks now that it has become one of the more expensive cities in the country outside the two coasts?
Willett notes the most expensive housing markets are seeing more household leave than they are able to attract from other states. Places like New York, the Bay Area, Los Angeles and Boston would be losing population if it weren’t for international immigration.
“There’s still a big difference between living costs in the nation’s most expensive markets and Denver, but that gap is getting smaller. Rising costs certainly could cool the metro’s population growth rate over time,” he said.
And a lot of apartments are in the pipeline and they will struggle to find tenants during a recession, whenever it comes. But Willett thinks that will be a “cyclical bump in the road.” Denver would have to suffer a loss of economic vitality, something comparable to what cities in the Rust Belt did in the 1970s to 1990s, for housing prices to suffer a big and sustained drop.
“Something like that certainly isn’t anticipated in Denver’s future,” he said.
