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Strong Demand for Denver Apartment Properties Continues Through Q3 2015

Sunday, October 25, 2015

A brief look at capitalization rates of apartment properties in Denver over the last 15 years shows a remarkable change in risk pricing following the financial crisis of 2008. Between 2002 and 2007, Denver Metro Apartment Capthere was a visible downward trend in the relative spread between the 10-year U.S. Treasury and cap rates on apartment properties of 100 units and larger sold in metro Denver.

The average spread over this time period was 160 basis points and narrowed to just 80 basis points in 2006 and 2007. Beginning in late 2008 and continuing through 2015, this spread averaged approximately 340 basis points, indicating a rational pricing of risk with price increases based on strong property-level performance.

While forecasts project increasing interest rates in late 2015 or early 2016, the current tumultuous geopolitical environment will likely make any move to increase rates by the Fed and any commensurate movements in cap rates somewhat constrained.

2014 was a record year of apartment sales in Colorado as transaction volume of apartment properties 50 units or larger topped $3 billion for the first time. Denver Metro Apartment SalesThrough Q3 2015, 73 properties of 50 units or larger have traded for a combined value of just over $2.75 billion. Strong Denver metro effective rent growth – 9.17 percent since Q4 2014 – driven by consistent population increase has contributed to strong demand for Denver apartment properties. Additionally, select new construction properties are being marketed as pre-sales or during lease-up as merchant builders look to capitalize on the favorable investment environment present here in Denver. Institutional and high net worth capital remains aggressive for Denver’s well-located apartment properties. 

Information provided by HFF Denver, recognized at the No. 1 Commercial Mortgage Company by the Denver Business Journal.


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