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Apartment vacancies in the Denver metro area fell to 6.1 percent in the second quarter, the lowest rate in two years, according to a report released Tuesday by the Apartment Association of Metro Denver and the Department of Local Affairs’ Division of Housing. And vacancy rates could be headed lower, much lower.
The metro area apartment market, with growing demand from renters and little construction on the horizon, could see its current vacancy rate cut by almost half, equaling or exceeding its highest occupancy rate ever, said Jeff Hawks, principal of Apartment Realty Advisors.
Pent-up demand for apartment huge
“There are now only about 17,000 vacant units out of 289,000 units,” Hawks said. In the next five years, 180,000 people in the Denver area will turn 20, and even a small portion of them could easily fill all of the empty apartments, he said. the lowest vacancy rate on record was 3.6 percent in 1994, but it is almost impossible to get past a 98 percent occupancy rate (2 percent vacancy rate) because of normal turnover in apartments. Hawks said the market is already experiencing a huge amount of pent-up demand, as young people are sick of doubling up or living with their parents.
Rents rising, but not enough for construction
And while landlords are starting to raise rents by as much as 10 percent, rental rates would need to rise by 20 percent to 25 percent to justify a construction boom, said Hawks and Lauren Brockman, principal of Orion Real Estate Services.
“I think we could be heading towards a huge shortage of apartments,” Brockman said.
Hawks said that today’s market is eerily similar to 1979, when baby boomers moved to Denver in droves. The market responded by adding 75,000 apartment units in about a half dozen years. That, however, is not in the cards.
In the 1970s, many of the baby boomers were college-educated and single, who planned to buy homes in the near future.
Quality of life drives demand
And some of that is still going on, Hawks said. He said there appears to be a largely uncounted market of people who were laid off from their jobs, and decide to move to Denver for the qualify of life here.
“They figure that if I can’t find work in Chicago, this is a good time to move to Denver, a place where I really want to live, and try to find a job there,” Hawks said. Indeed, he recently hired a financial analyst for his office who lost a job out of state and moved to Denver without a job.Hawks said 40,000 people have moved to Colorado this year, and many of them did so without jobs.
But while the educated workforce tends to marry and have children later, there is a much bigger wave of Hispanics moving to the area. Many of them have larger families and lack college degrees and are more likely to rent than buy, Hawks said.
Arizona immigration laws could impact Denver-area apartments
Hawks said he believes that the focus on the immigration laws in Arizona will result in a lot of Hispanics, many of them undocumented workers, move to Denver.
“There have been some abuses,” Hawks said. He said he served on a subcommittee for the Apartment Association of Metro Denver, that looked into the plight of poor, undocumented renters. In some cases, Hispanics were renting a one-room apartment to three or four men, and charging them $400 or $500 a month. What they didn’t realize, or were afraid to ask, is that they could each rent their own small apartment for the same amount, Hawks said.
Even among college-educated renters, there is not going to be the exodus from apartments to homes as there has been in the past, despite record low mortgage rates, predicted Brockman.
Young renters wary of homeownership
“A lot of these young renters have older friends who were burned in the housing market,” Brockman said. “They have come to realize that homeownership doesn’t mean you are going to see your profits go through the roof. If you look at just your principal and interest payments, in some cases it is cheaper to own than to rent. But when you look at the total cost of home ownership – insurance, buying lawnmowers, furniture and everything else,
The last time rates were lower was in the first quarter of 2008, when the overall vacancy rate for all apartments was 5.9 percent. Rate,s are down 32 percent from the second quarter of 2009, when they stood at 9 percent. In the first quarter, they were 6.5 percent.
In recent years, vacancy rates have tracked closely with the unemployment rate, illustrating a close connection between job growth and demand for apartments. In recent quarters. however, vacancy rates have remained low in despite job losses and slow job creation.
Apartments filling up, despite few job
“Vacancy rates continue to tighten in spite of meager job growth,” said Gordon Von Stroh, professor of business at the University of Denver, and the report’s author. “There has been little new apartment development in recent years, so the tight supply we do have will become even tighter once we start to see some large-scale job creation.”
Vacancy rates had initially increased following the rapid increase in the unemployment rate in late 2008 and early 2009. But the vacancy rate quickly fell below eight percent by the end of 2009.
For 2010’s second quarter, the highest vacancy rates were found in Denver County where rates fell year-over-year from 9.8 percent to 7.4 percent. Rates were lowest in Douglas County where vacancies fell year-over-year from 5.8 percent to 3.9 percent. Vacancy rates fell in all metro Denver counties form the second quarter of 2009 to the same period this year. 2010’s first quarter vacancy rates by county were Adams, 5.2; Arapahoe, 6.4; Boulder/Broomfield, 4.9; Denver, 7.4; Douglas, 3.9; Jefferson, 5.4.
Rent growth was unusually strong. The metro-wide average rent increased year over year from $870.37 to $899.97 during the second quarter. For the first time in more than a year, all counties reported year-over-year increases in county-wide average rents.
“We’re starting to see signs of more significant increases in rents,” said Ryan McMaken, a spokesperson for the Division of Housing. “Rent growth, which hasn’t been adjusted for inflation in this survey, has been very moderate for several years now. But we’re likely to see more growth in the short- and medium-term as population grows and supply remains stable.”
Average rents for all counties were: Adams, $892.48; Arapahoe, $856.54; Boulder/Broomfield, $995.07; Denver, $909.46; Douglas, $1085.79; and Jefferson, $845.38.
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