Denver apartments: Reasons to be bullish

Share/Bookmark

Apartment vacancies in the Denver area have been rising with unemployment, but a report released today shows signs that the market could be turning around.

Following an unexpected drop in the third quarter, metro Denver apartment vacancy rates rose during 2009’s fourth quarter to 7.7 percent, about a 4 percent increase from the 7.4 percent vacancy rate in the third quarter. Average rents also rose.

Still, last quarter’s vacancy rate was about a 2.5 percent drop from 7.9 percent at the end of 2008, according to a report released today by the Apartment Association of Metro Denver and the Department of Local Affairs’ Division of Housing.

“In general, we expect to see vacancy rates rise from the third quarter to the fourth due to seasonal factors, said Gordon Von Stroh, professor of business at the University of Denver and the report’s author. “But at 7.7 percent, we still see softness in the market.”

However, an analysis by InsideRealEstateNews.com shows that the third-quarter-t0-fourth-quarter increase was the smallest percentage increase since 2005. it was the lowest fourth-quarter vacancy rate since it stood at 6.1 percent in 2007.

Apartment market mending

And Von Stroh and other experts say that there are reasons to believe that Denver’s apartment market, considered one of the healthiest in the country, will show signs of getting even better. Rising unemployment, however, could put the brakes on the apartment market,

“Unemployment went up in the fourth quarter and when you overlay the apartment vacancies with the unemployment rate, there is a pretty strong correlation,” Von Stroh said. (See chart below.)

Still, he said demand will increase for multi-family units because of immigration, “natural population growth, and because rents are not high enough to justify construction of new apartment communities, he said.

“It’s simple supply and demand,” Von Stroh said. “My only concern is a lack of job growth and rising unemployment. Otherwise, I am quite bullish.”

Unemployment, slow wage growth, concerns

Pat Coyle, head of the Colorado Division of Housing, agrees. “In December, unemployment in the Denver area rose for the first time since August,” and personal income growth has been less than 1 percent, Coyle said. “This means that many renters will be doubling up and looking for ways to cut costs.”

Also, last year showed a positive absorption of 4,069 units, compared to negative absorption of 3,554 units in 2008. That means, in short, that more units were rented than vacated last year.

Absorption rate key

Terrance Hunt, an apartment broker with Apartment Realty Advisors, said the absorption number in some ways speaks more to the market than the vacancy rate.

“I think the absorption rate is extremely important,” Hunt said. “It shows that last year was a good, solid year, despite the tough economy.”

And much like the housing market, the Denver-area apartment market never became as over-built like other markets, such as Phoenix and Las Vegas, he noted. “One reason is that we never fully recovered from the tech-wreck in 2001,” said Lauren Brockman, principal of Orion Real Estate Services.

Rents steady

The average monthly rental rate was $875.39 in the fourth quarter, down from $888.81 a year earlier and down from $880.99. Brockman said rates typically need to rise about 25 percent before justifying new construction. The highest average rent was reported in Douglas County at $1027.15, and the lowest was reported inArapahoe County at $847.95. Average rents for all counties were: Adams, $809.39; Arapahoe, $847.95; Boulder/Broomfield, $943.23; Denver, $902.66; Douglas, $1027.15; and Jefferson, $848.75. When compared to the fourth quarter of 2008, only Douglas County and Jefferson County reported increases in overall average rents. Adams, Arapahoe, Boulder/Broomfield, and Denver counties all reported decreases in overall average rents.

“I think the public needs to know that they are really getting a good deal, as far as apartment rental rates,” Brockman said. “I think renters sometimes think they are paying too much.” But the reality, he said, is today’s market rates are very close to what you would pay for subsidized, government-backed housing, based on incomes and rents.

Foreclosures not helping apartments

Something else that might surprise many people is that rising home foreclosures are not helping the traditional apartment market. Von Stroh noted that if a family loses their home in a foreclosure, instead of leasing an apartment in a building, they will rent another home. “They need room for their kids and their dog,” he said.

Not only that, they don’t move far from the house that they lost, which Brockman argues is good for society, even if it doesn’t help fill vacant units in apartment buildings.

“The truth is, what happens after a single-family home foreclosure, is the family moves into a rental house down the street,” Brockman said. “That is good for society, because their children can stay in the same school.”

The irony is that they may be moving into a home that itself was a foreclosure, and now is owned by an investor.

Greg Bacheller, franchise owner of Real Property Management Colorado, manages about 1,000 rental properties in the Denver area. About 50 percent of them are single-family homes.

Reluctant landlords abound

Typically, they are “reluctant landlords,” who can’t sell their home. Rather than take a $2,000 loss each month on their mortgage, they rent it out, absorbing a loss of a couple hundred dollars each month. “None of these people bought their homes with the idea of renting them out,” Bacheller said.

Other homes are foreclosures purchased by investors. “They can’t fix and flip anymore, so they fix and rent,” Bacheller said. However, as more homes are foreclosed, it will increase the size of the pool of home rentals, making it more difficult to raise rents. “The supply of (home) rentals will be increased by foreclosures,” he said. “But I do think that 2010 will be the year that supply and demand become very close to being balanced.”

Hunt said that the other thing to consider is that even with the extension of the federal tax credit until April 30 for first-time home buyers, it is harder to quality than ever, which means that home-buying will not rocket. That means that not only will more people be forced to rent, but fewer renters will become buyers.

“A couple of years ago, during the subprime craze, the main reason people left apartments was to buy a home,” Hunt said. “Now my mortgage broker friends tell me, “We have these federal tax credits and great interest rates, but no one can qualify.”

The highest vacancy rates were found in Denver County where rates rose year-over-year to 8.8 percent, and were lowest in Douglas County where vacancies fell year-over-year to 5.5 percent. During the same period, vacancy rates rose in Denver and Arapahoe Counties, and fell in Adams County, Douglas County, and in the Boulder/Broomfield area. Jefferson County reported no change. Fourth quarter vacancy rates by county were Adams, 6.3; Arapahoe, 8.6; Boulder/Broomfield, 5.8; Denver, 8.8; Douglas, 5.5; Jefferson, 7.3.

In general, a vacancy rate of 5 percent is considered the “equilibrium” rate. Rates below 5 percent indicate tight markets.