Only Colorado Springs and Sterling, out of 22 cities and towns surveyed, reported fewer vacancies during the third quarter of this year than during the same period last year, according  to a report released today by the Department of Local Affairs’ Division of Housing. And monthly rental rates were basically flat from a year earlier.

Among large metropolitan areas, Fort Collins and Loveland reported the lowest vacancy rates at 5.9 percent and 4.3 percent respectively. All other metro areas measured in the survey reported vacancy rates above 7 percent.

Pueblo and Grand Junction reported the largest increases from the third quarter of last year to the third quarter of this year. In Pueblo, rates rose from 6.8 percent to 12 percent year over year, while they rose from 2.4 percent to 7.5 percent in Grand Junction during the same period.

Third quarter vacancies in the metro Denver area, measured in a separate survey last week, were at 7.4 percent.

“Although unemployment in Colorado fell in recent months, unemployment is still up when compared to last year,” said Gordon Von Stroh, professor of business at the University of Denver, and the report’s author. “In Grand Junction, for example, where vacancies are up quite a bit, the unemployment rate rose from 3.7 percent to 8.2 percent over the last year.”

However, the apartment vacancy increase was more  modest than expected.

Von Stroh said the consensus of most experts earlier this year was that the vacancy rate would rise to 10 percent by the summer, but it never hit those levels.

And although there are fewer people in the workforce than earlier this year when the unemployment rate was higher, he said the falling unemployment rate provides the confidence that the market is improving, making people more willing to sign leases.

Colorado’s unemployment rate in September was 7 percent,  compared with 5 percent a year earlier, but down from 7.3 percent in August. By comparison, the overall U.S. unemployment rate was at 10.2 percent in October and 9.8 percent in September.

“Unemployment in Colorado dropped, and most people did not think that was going to happen,” Von Stroh said. “The unemployment rate has dropped significantly, and the vacancy rate correlates very strongly with the unemployment rate. The unemployment rate dropping provides sends a strong psychological message. People says I’ve been living too long in my parent’s basement or I’m tired of having a roommate, and so they go out and rent an apartment.”

Terrance Hunt, a broker with the Denver office of Apartment Realty Advisors, agrees.

“The confidence factor is very important,” said Hunt, noting that vacancy rates typically drop from the second quarter to the third quarter, not rise as they did.

Still, he expected a vacancy rate of about 9 percent, not 7.4 percent.

“I think people who had seen a lot of layoffs at their companies and have survived all of the cuts, think they must be pretty valuable to the company and there’s a pretty good chance they will not lose their jobs,” Hunt said. “So they now have the confidence to move out of mom and dad’s basement and get their own place.”

However, he said it is possible – and even likely – that vacancy rates will rise in the fourth quarter from the third quarter, as they tend to do for seasonal reasons.

“But this is a great indicator for 2010 showing signs of recovery,” Hunt said. “The state is still adding households and little supply is being added to the market, which bodes very well for 2010. I think we will then start being able to get down to the 5 percent or 6 percent vacancy levels.”

In general, a vacancy rate of 5 percent is considered to be the “equilibrium rate.”

Colorado Springs was the only metropolitan area where vacancies fell. Experts note this is likely due to recent troop arrivals in the region which has led to an increased demand for housing in the area.

Average rents were flat or falling in many areas of the state from the third quarter of 2008 to the same period this year. Rents fell in Colorado Springs, Greeley and the Fort Collins/Loveland area. In spite of increases in the vacancy rate, however, some areas reported rental increases. Average rents increased from $514.17 to $554.58 year over year in Pueblo, and they rose from $670.24 to $674.31 in Grand Junction during the same period.

In non-metropolitan areas of the state, average rents rose in Alamosa, Buena Vista, Durango, Ft Morgan/Brush, Glenwood Springs, Montrose, Sterling, Summit County and “Southeastern Colorado.” Rents were flat or falling in Aspen, Cañon City, Eagle County, Gunnison, Lake County, Salida and Steamboat Springs.

“It’s difficult to raise rents in the current economic environment, and we’ve seen rents fall in several metro areas including the Denver metro area, which is certainly good news for renters” said Ryan McMaken, a spokesperson with the Division of Housing. “Many owners who are trying to cover the increasing costs of apartment ownership will continue to raise rents where they can. But this carries the risk of increasing costly turnover, so it’s a balancing act.”

The Vacancy and Rent Surveys are a service provided by the Colorado 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 report  is available online at the Division of Housing.

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