Corrected entry: When Rachel is looking for an apartment, Phoebe says she can stay with her because her roommate Denise will be gone until December 26th. But when the apartment burns down and they plan to move back in episode 10 of season 7, nobody cares that Denise would've been back a LONG time and also doesn't have an apartment, because Phoebe wants Rachel to move in with her.
Correction: Even assuming Denise was real (and I agree with the "Santa Claus" argument meaning she may well be), it's perfectly plausible that there was an off-screen conversation / event where Denise found somewhere else to live due to the fire and then didn't need to move back in with Phoebe. Plenty of life events happen to the cast outside of the episodes.
Correction: Denise was made up.
It doesn't make any sense that Denise was made up. Why? Because when Phoebe tells Rachel that her roommate Denise will be gone until December 26, and Rachel jokes, "maybe she's Santa Claus," look at Phoebe's face. She wouldn't react that way to a roommate that *she herself* made up.