Apartment vacancy rates in the Colorado Springs area fell to a 9-year low of  5.8 percent during the second quarter of 2010, shows a report released today by the Apartment Association of Southern Colorado and the Colorado Department of Local Affairs’ Division of Housing.  Overall vacancies fell in the Colorado Springs area from a rate of 9.8 percent reported during the second quarter of 2009. The rate fell from 2010’s first quarter rate of 6.9 percent. The Colorado Springs-area vacancy rate has not experienced an increase since the first quarter of 2009.

The first quarter’s rate of 5.8 percent is the lowest vacancy rate recorded since the third quarter or 2001 when vacancies were 5.4 percent. The vacancy rate rose to 8.9 percent during the fourth quarter of 2001, and never fell below 8 percent again until this year.

Troops drive demand

“Increases in the local troop population have clearly been a factor, but we’re also seeing the impacts of very little new production in multifamily housing in recent years, said Gordon Von Stroh, the report’s author and a professor of business at The University of Denver. “Not all permits translate into actual completed units, and for buildings with five or more units, only eight permits were issued for units in a single building in 2009. Zero permits have been issued through May of this year.”

Year over year, vacancy rates fell the most in the “Southeast” market area of Colorado Springs where vacancy rates were more than cut in half from 17.8 percent to 6.7 percent. Vacancy rates were lowest in the Far Northeast and Southwest market areas with vacancy rates of 4.7 percent and 3.7 percent, respectively.

Vacancy rates for all market areas were: Northwest, 6.0 percent; Northeast, 5.8 percent; Far Northeast, 4.7 percent, Southeast, 6.7 percent; Security/Widefield/Fountain, 11.7 percent; Southwest, 3.7 percent; Central, 7.7 percent.

Rates barely budge

In spite of significant drops in vacancy rates, the metro area’s overall average rent increased only slightly year over year. This year’s second quarter average rent rose to $719.22 from 2009’s second-quarter rent of $717.65. In individual market areas, from the second quarter of last year to the same period this year, average rents fell in the Northeast, Far Northeast and Security/Widefield/Fountain areas. During the same period, average rents rose in the Northwest, Southeast, Southwest and Central market areas.

“Average rents have increased in the area, but a lack of job growth across the region will keep some downward pressure on rents,” said Ryan McMaken, a spokesman for the Colorado Division of Housing. “This rent data is from June, and June employment data shows that year-over-year employment in El Paso County fell by about seven thousand. It’s tough for apartment owners to raise rents in such an environment.”

Average rents for all market areas were: Northwest, $765.40; Northeast, $703.97; Far Northeast, $840.25, Southeast, $613.56; Security/Widefield/Fountain, $615.66; Southwest, $733.66; Central, $659.79.

Apartment Realty Advisors is also a major sponsor of this report. The Vacancy and Rent Surveys are a service provided by the Colorado Department of Local Affairs’ Colorado Division of Housing and the Apartment Association of Southern Colorado to renters and the multi-family housing industry on a quarterly basis. The Colorado Springs Area 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. For more information, please contact the Apartment Association of Southern Colorado at http://www.aacshq.org ; or please visit the Colorado Division of Housing web site: http://dola.colorado.gov/cdh/

Contact John Rebchook at JRCHOOK@gmail.com or 303-945-6865.

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The first quarter’s rate  is the lowest vacancy rate recorded since the third quarter or 2001 when vacancies were 5.4 percent. The vacancy rate rose to 8.9 percent during the fourth quarter of 2001, and remained above 8 percent  for the following eight years

Troops make all the difference

“Increases in the local troop population have now clearly had an impact in Colorado Springs,” said Gordon Von Stroh, professor of Business at the University of Denver, and the report’s author. “Also, with so little recent new construction of multifamily units in the area, the market will likely remain tight for a while.” Colorado Springs is home to the Fort Carson Army Base.

Year over year, vacancy rates fell significantly in the “Northwest” and the “Far Northeast” market areas of Colorado Springs where vacancy rates were more than cut in half to 5.1 percent and 4.5 percent respectively.  In the “Security/Widefield/Fountain” market area, where vacancy rates have often risen above 20 percent in recent years, vacancies fell to 14.2 percent, a four-and-a-half year low. All market areas reported lower vacancy rates for the first quarter of 2010 as compared to the same time last year.

Rents reach record 1st Q levels

In response to falling vacancies, average rents have increased, but at a moderate pace. The average rent for the first quarter of 2010 was $710.07, which is a slight drop from 2009’s fourth quarter average rent of 711.66, and average rents remain below the most recent high of $717.65 reported during the second quarter of last year. Nevertheless, the first quarter’s average rent is the highest first quarter rent level ever recorded.

“Average rents have increased in the area, but a lack of job growth across the region will keep some downward pressure on rents,” said Ryan McMaken, a spokesman for the Colorado Division of Housing. “March employment data shows that the unemployment rate in the region was unchanged since February, so rent increases are likely being tempered by limited wage growth.”

The area that reported the highest average rents was the “Far Northeast” region with an average rent of $811.14, and the area with the lowest average rent was the “Southeast” region with an average rent of $598.86

Apartment Realty Advisors is also a major sponsor of this report. The Vacancy and Rent Surveys are a service provided by the Colorado Department of Local Affairs’ Colorado Division of Housing and the Apartment Association of Southern Colorado to renters and the multi-family housing industry on a quarterly basis. The Colorado Springs Area 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. For more information, please contact the Apartment Association of Southern Colorado at http://www.aacshq.org ; or please visit the Colorado Division of Housing Web site: http://dola.colorado.

Contact John Rebchook at JRCHOOK@gmail.com or 303-945-6865

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Today, some experts said that the record low, although bad news for those who make their living building homes and apartments and the overall economy, is good news for anyone trying to sell their own home, and for landlords of apartments who won’t face competition from new communities anytime soon.

“It is so important that we are getting control of the supply,” said Byron Koste, director of the Colorado Real Estate Center at the University of Colorado in Boulder. “It is very good news for the Denver area and the whole region that we are getting the excess out of the supply.”

That said, anytime an industry takes it on the chin, especially one with the huge multiplier effect of the construction industry, it hurts.

“The industry does not like it,” Koste said. “We like to go out and build things. That is what the industry is designed to do. Developers and builders look at what is happening, and say “What is good about it?’

Housing slump hits economy

As far the toll on the entire economy, much is not good about it. The economic fall-out far exceeds those directly involved in construction, because building touches so many other parts of the economy. As Tom Clark, executive vice president of the Metro Denver Economic Development Corp. said earlier, some person working in a factory making dishwashers may be laid off because of a slump in home building. It also means that out-of-work framers, plumbers and electricians are not frequenting the area 7-11 store to buy a Slurpee. The list goes on and on.

Still, building beyond demand makes no sense, Koste said.

“Continuing to build things that we don’t need, yes, would  help job- creation for a short while, and jobs are very important,” Koste said. “But it  is more important to come down on the side of getting rid of the excess supply. It is time to come down on the side of balance.”

There were only 2,378 permits pulled in the Denver area last year for single-family homes, the lowest on record. That is a 35 percent drop from the 3,686 permits issued in 2008, the second lowest on record. Permits signal future home starts.

That is good news for people who already are homeowners, as they do not have to compete with many new homes on the market.  That, combined with the $8,000 tax credits for first-time home buyers and the $6,500 tax credit for qualified existing home buyers, should help the home sales market this year. Buyers must put the home under contract by April 30 and close by the end of June to take advantage of the credits.

“That should help the market,” Koste said. “But I don’t want people to read this and think, “Wow, the market is really going to soar now and prices will dramatically improve,” because that ain’t going to happen. We still have all this crap on the market that we need to burn off. That is what created the problem in the first place.”

Tougher to get loans

In addition, it is more difficult to qualify for loans than it was in the past, so not as many people will be able to take advantage of the confluence of super-low interest rates, tax credits and home prices that are at a much lower level than in recent years. Only lower-end home values have been rising from their lows in the Denver area.

Apartment hit hard

The biggest drop in permit activity was for apartments. Permits were only issued for 438 apartment units last year, a 90 percent drop from the 4,413 issued in 2008. That was the lowest number of apartment permits issued since 1991, when developers only pulled 208 permits for apartment unit.

Steve Rahe, an apartment broker with Grubb & Ellis, was glad only 438 permits were pulled last year.

“I like that number,” Rahe said. “I think that is fantastic!”

Rahe said that the drop in permits is a sign of what happened in the economy last year.

“I think that it shows just how bad off the economy was in 2009,” Rahe said. “We just had to many apartments on the market. The excesses in supply had to be dealt with and I think it is great that so few units were added to the supply. What that will mean is that today’s apartment vacancy rate in the 7.9 or 8 percent range will come down to 5 percent or 6 percent in the coming years. If you believe in supply and demand, it will mean that building owners will finally be able to raise rental rates.”

He said that the Torto Wheaton Research Group recently predicted that Denver’s apartment market will likely be one of the five top performers during the next three years, along with Boston, Austin, Atlanta and Minneapolis.

“I have to think a lot of that is because the number of our permits are so low that we are not increasing the supply,” Rahe said.

If “organic” growth such as people graduating high school and pent-up demand from people living with their parents who are eager to strike out on their own occurs and there appears to be a looming shortage of apartments to rent, Rahe “I suspect the development community will look at the demographics and will address that. I think we could see some people looking at building something at the end of 2010 or in 2111. Time will tell.”

Contact John Rebchook at JRCHOOK@gmail.com or 303-945-6865

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Permits issued for single-family homes, condos and townhomes and apartment units fell by almost 64 percent from the 9,429 issued in 2008, which was the second lowest year for building activity since at least 1980 in the Denver area, according to data from the Home Builder Association of Metro Denver, obtained by InsideRealEstateNews.com.

“The big picture is that this is sort of a necessary evil,” said economist Patty Silverstein, principal of Littleton-based Development Research Partners. “As painful as this is for builders and developers, we have to see a stop in the increase of the supply, in order to see improvements in the market. While I think that this year will continue to  be slow, I think we can see some improvements next year.”

In addition to a lack of demand, banks also have been unwilling or unable to lend, which also has crimped the ability of many small builders, she said.

Whatever the reason for the downturn, one thing is clear – the  collapse in Denver-area construction activity last year was unprecedented.

“Historically, if we look over the last 30 years, we have issued an average of 17,000 permits per year,” Silverstein said. The market peaked in 2000, with 28,310 permits issued.  And to put last year’s activity into perspective, consider that it was a 78 percent drop from the 15,890 permits issued in 1980. Since then, the population of the area has grown by about 70 percent. Overall permit activity in the Denver area has dropped from the previous year every year since 2005. Permit activity is down 88 percent from its 28,310 peak in 2001 and is down 77 percent from 2007, when 14,729 permits were issued.

The biggest hit last year was to the apartment market. Permits were issued for only 438 apartment units last year, a 90 percent drop from the 4,413 in 2008. Jeff Hawks, co-owner of the Denver office of Apartment Realty Advisors, said that rental rates in the Denver area need to rise by 20 percent to 30 percent to justify new construction. Because inflation of rents does not appear to be in cards anytime soon, especially given the poor state of the economy, there is no need to build more market-rate apartment communities in the metro area for four or five years, he argues.

What little appreciation people have seen in their homes recently, in large part is because builders are not increasing the supply, noted Tom Clark, executive vice president of the Metro Denver Economic Development Corp.

On one hand, that is good for individual home owners, “although sometimes we view affordable housing as an economic advantage,” for attracting companies to the area and encouraging companies to stay, he noted. Hawks noted that unlike the mid and late 1980s, when Denver was mired in a recession because of the collapse of oil prices and an economy that was not diversified, “now there is no place to go.” Indeed,  people continue to move to Colorado with the hope that our economy will recover faster than other parts of the country, Clark said.

Still, the construction industry coming to a standstill hits the overall economy hard, Clark said.

“Construction is sometimes a leading indicator and sometimes a lagging indicator, depending on what kind of recovery you are having,” Clark said. “But when you look at the unemployment rate in construction approaching the levels we have not seen (since the Great Depression) of the 1930s, it has a huge impact. A large percentage of the people in the construction industry get paid well and they turn over their money very quickly in the marketplace. It has a huge multiplier associated with it, because the housing market touches so many other parts of our economy.”

In years past, Denver has used huge construction projects to pull itself out of its economic doldrums.

“Historically, we built ourselves out of a crisis. We built DIA, and the Colorado Convention Center,” as well as Coors Field and Invesco Field,” Clark noted. “Unfortunately, when the financial institutions are in meltdown and people have lost 30 percent of their net worth, it is hard to get excited to fund these massive projects.”

One bright spot is the redevelopment of Union Station as part of FasTracks, thanks to the federal government planning to provide a $300 million loan. “The federal government did its part in that instance,” Clark said. “But what we really need from Washington is to point which direction we are going. The federal government has never been very good at execution, but it is usually very good at finger pointing. There is no finger pointing, at least not in the direction they expect us to head. If they did that on health care, for example, companies could pull out their calculators and look at their expected profits and losses. But there is no fingers pointing us in a direction that will get us out of this mess. I blame both Republicans and Democrats. I think Congress should be ashamed of itself.  There is no reaching across the aisle to accomplish what needs to be done.”

As grim as it is, it is far worse in other parts of the country, Clark noted.

“At least we’re not Phoenix, or other markets, where a great number of people have experienced huge losses in their home values,” Clark said.

What ultimately will get the construction industry back on its feet is jobs, especially well-paying ones, he said.

“Construction always follows jobs,” Clark said.

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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.

DU Professor Gordon Von Stroh notes that unemployment and apartment vacancy rates

Contact John Rebchook at JRCHOOK@gmail.com or 303-945-6865.

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Only 438 permits for apartments were issued in the first nine months, an 84.8 percent drop from the 2,885 permits issued in the first nine months of 2008, according to the most recent data from the Home Builders Association of Metro Denver.

Indeed, the percentage drop for apartments is almost twice the 44 percent drop for single-family homes.

But unlike housing, this is not a record-low number of permits issued for apartments. That occurred in 1991, when a mere 208 permits were issued for the entire year. And in 2005, only 406 permits were issued for the entire year.

Roger Reinhardt, executive vice president of the HBA of Metro Denver, noted that more than 23,000 permits were issued from 2000 to 2002,.

“Clearly, apartment became over-built during the cycle, so it is not unusual for apartment construction to drop way back after that happens,” Reinhardt said.

One of the reasons developers pulled so many permits during that era was that they feared that voters would approve an anti-growth  Constitutional Amendment that would erect a giant legal roadblock to construction, and they wanted to get their permits pulled in advance. Amendment 24, the anti-growth measure, failed in 2000, leaving too many apartments being built for the demand.

Steven Rahe, an apartment broker who is a senior vice president at Grubb & Ellis,  is thrilled that building permits are at such a low level this year.

“If you had told me at the beginning of the year that we would see 1,000 or fewer permits pulled for apartment units in all of 2009, I would have been impressed and delighted,” Rahe said. “It is a good thing for the market and existing landlords.”

The HBA data shows that permits were pulled for 168 permits in Denver, down from 1,906 during the first nine months of 2008; 166 units in Littleton; 96 units in Lafayette and eight units in Boulder.

Rahe said the numbers are so small they are probably all affordable and tax-credit deals. It’s also almost impossible to get financing for market-rate units in this lending environment.

Ryan McMaken, spokesman for the Colorado Division of Housing, said the low number of permits being pulled is not surprising.

“But I keep thinking about the 35,000 households being created each year,” McMaken said. “At some point, we are going to have a shortage of apartment units, especially affordable units. There clearly is going to be a need for more affordable units going forward.”

Contact John Rebchook at JRCHOOK@gmail.com or 303-945-6865.

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