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February 2003
The Real Estate Perspective
James Real Estate Services, Inc.
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Lately, however, the law of supply and demand is showing its reverse side. As the economy tanked and jobs vanished,
many renters left Denver, doubled up with roommates or moved back home to mom and dad. Those with rosier eco-
nomic outlooks took advantage of low residential mortgage interest rates to buy houses or condominiums. The demand
for apartments plummeted just as much of the new supply came on stream. Result: vacancies up and rental rates down.
To get the equation back in balance will require two inter-related movements. Denver's economy must recover in order
to generate demand. Development must slow to get rid of the excess number of units. The first part of the equation re-
mains elusive. The recovery is, at best, tepid and jobless. Fears about a war in Iraq cause investors and businesses to
remain on the sidelines.
The second part, however, is underway. At the end of 2002 there were 8,164 apartment units under construction in
metro Denver, still too many even in a good year but well below the 12,000 units under construction one year earlier. To
put this into stark perspective, Denver normally enjoys net absorption in a "normal" year of about 5,000 to 6,000 apart-
ment units. Most of these 8,164 units will come on stream this year, pushing the vacancy rate from the already high
11.7% to as high as 15%, depending on demand.
However, after the rush of new units in 2003 the pipeline will be emptying. We know of about 5,600 units that have been
announced and could start construction in 2003. However, deteriorating market conditions are causing developers to
postpone or eliminate many projects. Part of this change in plans is due to the refusal of many lenders to consider Den-
ver loans in the current market environment. We expect that only about 3,000 to 3,500 units will actually start this year in
metro Denver, and many of those will be in the "affordable" class that remains in high demand.
We should also add a caveat here. While the overall apartment market in Denver is in bad shape there are positive
niches. Some of these are geographic and others reflect rental ranges. For example, the vacancy rate remains low for
older and smaller apartment buildings in central locations that appeal to low and moderate-income residents. Overbuild-
ing is primarily found in newer and pricier communities, especially in the suburbs where most of the new construction is
occurring.
So, the apartment market in Denver is operating in the face of several big "ifs." If demand recovers, if development
Denver Market Analysis--February 2003
(Continued)
Past Month's Real Estate Perspective Entries
Airport/Aviation
· Passenger traffic at Denver International Airport declined to a five-year low in 2002, reflecting less travel due to
the recession and to continued fear about terrorist attacks on commercial airlines. DIA reported that 35,643,749
airline passengers used the airport in 2002, down 1.2% from 2001 and off 8% from the airport's record travel
year in 2000. (Rocky Mountain News, 2/5/2003) (80249)
· Frontier Airlines postponed plans to lease more gates at Denver International Airport. The Denver-based airline
was planning to lease an additional 14 gates at an expansion of the A concourse at the DIA terminal but shelved
those plans until United Airlines reveals its post-bankruptcy intentions for Denver. Frontier currently uses twelve
gates at DIA and needs additional space to accommodate planned expansion of service from its Denver hub.
(Rocky Mountain News, 2/6/2003) (80249)
· United Airlines, as part of its plan to emerge from chapter 11 bankruptcy, may spend about $25 million to expand
Concourse B at the Denver International Airport terminal. The expansion would allow United, which operates a
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