Wednesday, February 10, 2016

Inflation-adjusted rents in Metro Denver still near all-time highs

The 4th Q 2015 vacancy and rent survey showed that vacancy rose to a five-year high while rents were flat from the 3rd Q of 2015 to the 4th Q. Year-over-year, though rent growth was still substantial.

The rent data released by the Apartment Association's survey, however, are just nominal rents, and are not adjusted for inflation. So, I like to take a look at rents in terms of 2015 dollars only, so we can compare more accurately with rents as they were in previous business cycles.

We know that nominal rents are currently near the highest levels ever. But where are they once adjusted for inflation?

Well, it turns out that even when adjusted for inflation, the average rent in metro Denver is still near all-time highs.

In this case, the fourth quarter average rent for metro Denver was $1,292, which is equal to the third quarter and up from the average rent during the fourth quarter of 2014 which was $1174.

However, it wasn't that long ago that the average rent was still below where it had been during the dot-com boom days in real terms. Specifically,  the average rent hit 1,084 during the fourth quarter of 2000. That level was not passed again until the first quarter of 2014. During most of the period from 2001 to 2001, the average rent was actually falling in real terms:

So, when adjusted for inflation, we do find that rents really do go down, as they did during the housing boom and many households were leaving rental housing behind for purchase homes. The foreclosure crisis and lackluster income growth since 2009 (among other things), however, has made rentals relatively more attractive in recent years, and rent growth has now surpassed the dot-com days. 

As  a final note, let's look at  the unemployment rate versus the vacancy rate. Historically, the two have often trended together, and this was especially true before 2008:

Since 2008, though, the vacancy and rent has become less sensitive to employment trends, perhaps due to a relative decline in the attractiveness of purchase housing, and the fact that household formation has tended to outpace multifamily construction in recent years. With the fourth quarter's sizable increase in vacancies, it is unclear if this signals a trend, although vacancy rate may be responding the the continued decline of job creation in metro Denver.

All data comes from the Apartment Association of Metro Denver's apartment vacancy and rental survey, and from the Bureau of Labor Statistics.