The Denver-area apartment market is on fire.
The overall vacancy rate fell to 6.5 percent in the first quarter, a 22 percent drop from the 8.4 percent vacancy rate in the first quarter of 2009, bucking a seasonal trend of falling rates, noted Gordon Von Stroh, the University of Denver business professor who authored a report released today by the Apartment Association of Metro Denver and the Department of Local Affairs’ Division of Housing,
And while monthly rental rates are basically flat, the smart money is that they are poised to rise.
That can be seen in demand from buyers. Today, when an apartment community is placed on the market, there are typically at least 30 offers coming in, while a year ago, the market was at a virtual standstill, said Terrance Hunt, an apartment broker with Apartment Realty Advisors.
Tax credit not creating exodus from apartments
Even the the federal tax credits of $8,000 for qualified first-time home buyers ( as well $6,500 for some move-up buyers ), which expire today, have only had a nominal impact on the rental market.
Hunt does have one renter in an apartment he owns who asked to go on a month-to-month rent, because he has a condo under contract that he hopes to close by the June 30 deadline for the tax credits.
Despite the tax credits, low interest rates, and sellers willing to part with their homes at realistic prices, there is not a huge exodus out of apartments, Hunt and Von Stroh said. For one thing, it is more difficult than ever to qualify for a loan, and some renters are finding that their work history and debt ratios are not strong enough to get the super-low rates they hear about, Hunt notes.
“And then some people look at what their mortgage payments would be and they are just not confident enough to pull the trigger,” Hunt said. “It’s not like a few years ago when everyone was leaving apartments to buy homes. Friends were telling stories about how they have only lived in their home for three months and they’ve already pulled $100,000 out of it. They looked at it like they had made $100,000 on their home. But the truth is, those people aren’t in such good shape today.”
He said many of the people taking advantage of the tax credits accelerated their decision because of them, and would have bought in the next eight to 18 months, without the credits.
Von Stroh said that some people are realizing that home ownership, while positive in many respects, does not have to be the American Dream for everyone.
“People are not participating in this great herd instinct of having to buy a home,” Von Stroh said. “Now, people are looking at the pros and cons of buying a home much more objectively.”
And that is good for apartment owners, because prospective home buyers often make the best tenants, who are willing and capable of paying higher rents, said Ryan McMaken, spokesman for the housing division.
“I have to think that the fundamentals for apartments are looking pretty good, at least in the short-term to the medium-term,” McMaken said.
Economy still weak, despite apartment strength
Von Stroh said that the strength in the apartment marketplace, is not a sign that the overall Denver-area economy is getting back on its feet.
“The apartment market had pretty much been tracking the unemployment rate,” Von Stroh said. “This time, rates fell, pretty substantially, even though unemployment is still fairly high.”
“In spite of the economy, there’s still relatively strong demand for rental housing right now,” said Lauren Brockman, a principal with Orion Real Estate Services. “Unemployment here is comparatively low compared with much of the nation, so people are staying here. And we’re also seeing people come in from out of state, so even with limited job growth, people want to be here, and many of them need apartments.” Reasons for the apartment demand, in addition to people not buying homes in droves, include population growth, and a limit on supply. Rents need to grow another 25 percent before it can justify construction of market-rate units, Hunt said.
Little apartment construction
“We added almost 8,000 new units in 2001 and more than 9,000 in 2002, so that lead to quite a few vacancies as unemployment rose in 2003,” Hunt said. “But we’re facing a much different situation now. Between 2003 and 2009 fewer than 3,000 new units were added each year, so we may be looking at some pretty tight markets in the near future.”
Vacancy rates in the first quarter fell to the lowest point since the third quarter in 2008. Vacancy rates peaked at 13.1 percent during the first and second quarters of 2003, but during the most recent recession, vacancy rates rose to only 9.0 percent during the second quarter of 2009.
For 2010’s first quarter, the highest vacancy rates were found in Arapahoe County where rates fell year-over-year from 9.7 percent to 7.2 percent. Rates were lowest in Douglas County where vacancies fell year-over-year from 7.1 percent to 4.4 percent. Vacancy rates fell in all metro Denver counties form the first quarter of 2009 to the same period this year. 2010’s first quarter vacancy rates by county were Adams, 6.8; Arapahoe, 7.2; Boulder/Broomfield, 5.0; Denver, 6.9; Douglas, 4.4; Jefferson, 5.8.
In general, a vacancy rate of 5 percent is considered the “equilibrium” rate. Rates below 5 percent indicate tight markets. “We only need to absorb a few thousands more units and we’re at 5 or 5.5 percent,” Von Stroh said. “We could get to that point very quickly.”
Average rents across the Denver metro area were largely stable. The overall average rent in the metro Denver area fell to $877.16, down from $881.92 during the first quarter of last year. Rents rose slightly from 2009’s fourth-quarter average rent of $875.39.
“Without job growth, and with renters looking to cut costs, it’s been difficult for owners to raise rents very much” said McMaken, the housing division spokesman. “However, once we see some job growth, demand should spur some significant rent increases.”
“Rental losses for owners from discounts and concessions are up compared to last year,” Brockman said. Concessions include offering tenants free rent for a month in return for signing a lease.
When compared to the first quarter of 2009, Adams County, Douglas County and Jefferson County reported increases in overall average rents, while average rents in Arapahoe and Denver counties fell.
Average rents in the Boulder/Broomfield were essentially unchanged as average rents increased by four dollar to $946.60.
The highest average rent was reported in Douglas County at $1055.12, and the lowest was reported in Arapahoe County at $833.94. Average rents for all counties were: Adams, $874.56; Arapahoe, $841.03; Boulder/Broomfield, $946.60; Denver, $883.87; Douglas, $1055.12; and Jefferson, $833.94.
Investment strategy shifts
Hunt, of Apartment Realty Advisors, said that a year ago, when investment demand was weak for apartments, investors were buying them on yield. Now, increasingly, they are looking at them based on replacement cost. Some buyers who purchased a year ago, are now in the position that they could flip them for large profits. “But most of those buyers still think there is a lot of the meat on the bones,” Hunt said. “They think there’s a lot of positive upside. They’re putting long-term debt on the property and see opportunity by adding value by increasing management services.” He said a lot of buyers believe they will be able to raise rental rates by 5 percent in the first year of ownership and 10 percent the following years
The Vacancy and Rent Surveys are a service provided by the Apartment Association of Metro Denver and the Colorado Department of Local Affairs’ Division of Housing to renters and the multi-family housing industry on a quarterly basis. The Colorado Vacancy and Rent Survey reports averages and, as a result, there are often differences in rental and vacancy rates by size, location, age of building, and apartment type. The full Report is available through the Apartment Association of Metro Denver at www.aamdhq.org; and limited information is available online at the Division of Housing Web site, at this link.
Contact John Rebchook at JRCHOOK@gmail.com or 303-945-6865.
