Elevated Apartment Construction Has Caused Soft Rental Market Conditions in the Denver HMA

Elevated Apartment Construction Has Caused Soft Rental Market Conditions in the Denver HMA

Sales housing market conditions in the Denver HMA are slightly tight, with an estimated vacancy rate of 1.1 percent as of September 1, 2023.

Katharine Jones is a regional economist in the Denver Regional Office for HUD's Economic and Market Analysis Division

HUD's Comprehensive Housing Market Analyses provide information on changes in local economies, housing markets, and populations and provide 3-year forecasts for demand in the area. This article is part of a series that sheds light on the content of these analyses.

The Denver-Aurora-Lakewood Housing Market Area (Denver HMA) in north-central Colorado is coterminous with the metropolitan statistical area of the same name and includes Adams, Arapahoe, Broomfield, Clear Creek, Denver, Douglas, Elbert, Gilpin, Jefferson, and Park counties. The HMA is home to more than half of the state's population and includes the city of Denver, which is the state capital and most populous city in Colorado. The HMA's population was an estimated 3.03 million as of September 1, 2023. Between 2020 and 2022, population growth in the HMA was slow, increasing by an annual average of 9,800, or 0.3 percent, because of the COVID-19 pandemic, which contributed to low levels of net natural change (resident births minus deaths) and slight migration out of the HMA. These trends are believed to have reversed since 2022 thanks to a reduction in the COVID-19 death rate and an increase in migration with the resumption of international migration and the popularity of return to office initiatives, which required workers to live within commuting distance of work. Population growth accelerated since 2022 to an average annual increase of 33,500 people, or 1.1 percent. A recent Comprehensive Housing Market Analysis highlighted the Denver HMA and reflects local conditions as of September 1, 2023.

Despite slower job growth in the HMA during the past 12 months, recovery from the COVID-19 pandemic was stronger in the Denver HMA than in the nation as a whole

The Denver HMA's economy is strong, although job growth has slowed in the most recent 12 months as the local economy transitioned from pandemic recovery to expansion. During the 12 months ending August 2023, nonfarm payrolls in the Denver HMA increased by 23,400 jobs, or 1.5 percent, to 1.60 million jobs, down from the 5.6 percent job growth rate during the previous 12 months. By comparison, national nonfarm payrolls increased by 2.9 percent during the 12 months ending August 2023 and 4.6 percent during the previous 12 months. Both the HMA and the nation as a whole recovered from the pandemic during 2022, and as of the 12 months ending August 2023, nonfarm payrolls were 3.8 percent and 2.8 percent higher, respectively, than their 2019 levels.

The government sector anchors the Denver economy, accounting for 13 percent of nonfarm payrolls. This sector includes public industries such as corrections, health care, higher education, legislative services, public services, school districts, and more. The largest employer in the HMA, University of Colorado Health, is a public health system that employs nearly 13,200 workers (Development Research Partners). The Denver HMA experienced job growth in 7 of the 11 payroll sectors during the 12 months ending August 2023, led by the government sector, which accounted for approximately 39 percent of total job gains. During the 12 months ending August 2023, the government sector gained 9,200 jobs, an increase of 4.5 percent over the previous 12-month period.

During the next 3 years, nonfarm payrolls are expected to increase by an average of 2 percent annually to 1.69 million jobs. Ongoing renovations at the Denver International Airport to increase passenger capacity and improve travel experiences are expected to support growth in the transportation and utilities sector and the leisure and hospitality sector.

Rising mortgage rates and limited inventory of for-sale housing contributed to declining home sales, and elevated apartment construction amid slow population growth in the early 2020s contributed to rising apartment vacancy rates

The home sales market in the Denver HMA is slightly tight, with an estimated vacancy rate of 1.1 percent as of September 1, 2023, unchanged from April 2020. Since 2022, rapidly rising mortgage interest rates have tempered home sales; according to Freddie Mac, the 30-year fixed rate mortgage interest rate averaged 7.1 percent in August 2023. In addition, the inventory of homes for sale remains low, in part because the swift rise in interest rates has effectively deterred would-be sellers currently holding mortgages with much lower interest rates. However, as of the fourth quarter of 2022, approximately 92 percent of mortgages in Colorado had interest rates below 5 percent (Redfin, a national real estate brokerage). In August 2023, the Denver HMA had approximately 2.0 months of inventory, down slightly from the 2.1-month supply a year earlier (CoreLogic, Inc.). The limited inventory has supported price growth despite declining home sales. During the 12 months ending August 2023, home sales fell 28 percent year over year to 52,750. During the same period, the average home sales price increased 3 percent year over year to $647,100. Rising interest rates also contributed to reductions in new home construction. During the 12 months ending August 2023, 7,100 new homes were permitted, down 38 percent from the previous 12 months. During the next 3 years, demand is estimated for 36,100 new homes.

The overall rental market in the Denver HMA is soft, with an estimated 7.9 percent vacancy rate, up from 7.6 percent in April 2020. Approximately 39 percent of renter households in the HMA live in the city of Denver. Strong levels of apartment construction in 2021 and 2022 coupled with slower population growth during the pandemic produced soft apartment market conditions in which rising vacancy rates suppressed rent growth. The apartment vacancy rate in the HMA was 8.0 percent as of the third quarter of 2023, up from 6.6 percent as of the third quarter of 2022, and the average apartment rent rose less than 1 percent year over year to $1,834 per month (CoStar Group). Despite the softening rental market, the number of rental units permitted remains elevated. Rental permitting decreased 20 percent to 16,450 units during the 12 months ending August 2023 but still was stronger than it was in any year from 2010 through 2020. During the next 3 years, demand is estimated for 30,450 rental units.