The Denver-area home rental market, which fell to a 2.9 percent vacancy rate, lowest third-quarter rate on record, appears poised to see vacancies go even lower and rents increase.
Experts today said that while housing rents have not kept pace with the dropping vacancy rates, they expect that will change next year. Also, they think that vacancy rate could fall even lower.
“I think vacancy rates could fall another percentage point,” said Gordon Von Stroh, a University of Denver business professor, and the author of the report for the Colorado Division of Housing. (For an earlier blog on the report please visit Rental home market hits low.) He also said that he expects to see the cost of renting a house, condo, town home or other small home to rise.
Lose a home, rent a home
Demand for rental homes continues to come from people who have lost their homes to foreclosures or in short sales, in which the lender agrees to take less for the home than the amount of the mortgage. “What we have found is that people with a family who lose their homes want to stay in a home, and will turn to a rental single-family home,” especially if that means their children can stay in the same school, he said. “I think that is a significant number of the renters, but not an overwhelming number.”
In addition, a number of renters who have out-grown their apartments – perhaps because they have had a second child – are now renting a house, instead of buying one, as they would have done four or five years ago.
“While home ownership is an ideal, some people are just not ready for it,” Von Stroh said. “A fact of life is that there is a group of people out there who realize at the present time that they should not be buying. They have gotten the wake-up call.”
Boulder rentals rock
The Boulder/Broomfield area had the lowest vacancy rate at 1.4 percent. It also showed the biggest percentage drop from a year ago, when it stood at 5.7 percent. Overall, the Boulder/Broomfield’s year-over-year percentage drop of 75 percent, was more than twice the Denver area’s drop of about 36 percent.
“In the Broomfield area, that is less of a factor,” Hornung said. “A lot of people are relocating to the area, and they are not buying. ” He said people taking high-tech, high-paying jobs, typically are renting homes near the U.S. 36 corridor.”
He said he finds it hard to believe that overall rents are going down. Indeed, while the monthly average rent is down from the third quarter of 2009, the overall median rent rose to $995 from $975.
“The trend is, anecdotally, that rents are going up. And with vacancy rates these low, rents are sure to rise,” Hornung said. He said he has heard that some landlords are willing to cut deals in order to retain or land financially strong tenants. Also, he said that macro-trends support rising rates. “Some people think the homeownership rate is going to fall from about 68 percent to 63 percent, which will mean more renters. And there are some people out there who are still waiting to buy homes until they are absolutely sure the market is at the bottom – of course, when they reach it, it will be too late,” to get the combination of low home prices and near historic low financing available in today’s market.
Both he and Von Stroh said that many landlords may not realize that there is enough demand in the market to raise rates and still fill houses. “And landlords and property managers are human,” Von Stroh said, and do not want to gouge tenants at a time when the economy is still fragile. Also, there is a fear that if rents are raised too quickly, many people will choose to move in with families and friends, he said.
Still, that bodes well for buying rental properties, he said. “If you have the capital to invest, it is a good time to be a landlord,” Hornung said.
Not so rosy
Susan Melton, principal of Assured Management, a property management company, said that while it is great that overall vacancy rates have dropped, “it’s not as rosy as you might think, given how low the vacancy rates are. The rental rates have not come back as high as we would have liked.”
To a certain extent, she said that homeowners now renting their homes may be “buying” lower vacancy rates, by lowering rents. “Some of that is going on,” Melton said. “We had high vacancies and so investors began lowering rental prices. People who call still want bargains. On the other hand, we have renters. A couple of years ago, we would lower rents weren’t drawing people in.”
The average rent for the metro area was $1,041.05 in the third quarter, down slightly from the $1,059.66 in the third quarter of 209. The average rent per square foot was 83 cents at the end of the third quarter, compared with 85 cents a year earlier.
“I think the economy is affecting the market,” Melton said. “Another thing is that we are seeing a lot of early lease terminations. People who have signed leases may later suffer a job loss or find a job out of state and have to relocate.”
Reluctant landlords abound
She said an increasing number of people who can’t sell their homes in this market are renting them. “I think as the jobless rate improves – and we are starting to see little flickers of hope – I think people will be able to sell their homes and the resale housing market will pick up. But I would hope some people decide they like the rental income and will still want to keep their homes in the rental pool.”
She said almost all of the new homes she is managing fall into the category of people whose first choice would be to sell their homes for a profit.
Robert Alldredge, principal of Jericho Properties, is experiencing the same trend of “reluctant landlords.”
Sometimes, however, it is just a perceived loss that is convincing them to rent their homes, rather than sell, he said.
“The other day I was talking to this lady who bought her home 30 years ago, and she will not sell it today because she does not want to sell it for a loss, so she is renting it until the market improves,” Alldredge said. “The truth is, whatever she sells it for will be a profit. She might have been able to sell it for $300,000 four years ago, and now she can sell it for $250,000. She perceives that as a $50,000 loss.”
He also recently met with a couple in their 30′s who are engaged, and unable to sell their respective homes. Instead, they are going to rent out both of their homes and buy another one together, to take advantage of near historic interest rates and low home prices.
Alldredge estimated that 90 percent of his new accounts are either people who can’t sell their home for a profit, or aren’t willing to settle for the price they could get into today’s market. “They are willing to ride out the market for a few years and rent their homes,” he said. “I think rents are heading on an upward trend. But you really have to break the market into different categories. No. 1, there are the investors who bought homes at low prices and with extremely low interest rates, expect to be able to rent their homes for a profit right out of the gate. And I do think that people who have owned their homes for a while, 10 years or longer, can probably rent their homes with positive cash flow. But if someone bought three or four years ago, they are under water.” Still, that might mean they are suffering a loss of $200 or $400 a month, instead of $2,000 or more per month, if they have no rental income.
Von Stroh, the report’s author, said he has heard of homes being put on the market and immediately receiving several offers to rent them. Alldredge said that property managers try not to move people into the homes that quickly, as it is too stressful for everyone involved and it doesn’t give time to clean or paint homes. Overall, the report shows it takes an average of 36 days to rent a home, the lowest since the report started in the third quarter of 2004.
Still, that probably under-estimates the speed in which homes are leased in today’s market, Alldredge said. He noted that his company agreed to lease a four-bedroom home in Arvada on Nov. 1, but the current person owner could not leave until the beginning of this month. A tenant signed a lease on Nov. 30, did a a final walk through in early December and moves in the home today.
“You could look at the days on the market as starting on Nov. 1, but actually, it was only vacant for seven days,” Alldredge said. “There was only a loss of income for seven days.”
Year Vacancy Rate Average Rent Median Rent
2004 8.5% $922.64 $893
2005 9.2% $912.47 $875
2006 6.4% $957.28 $900
2007 3.9% $957.29 $900
2008 3.4% $998.37 $950
2009 4.6% $1,059.77 $975
2010 2.9% $1,027.28 $995