Housing permits in Metro Denver up 18 percent in 2016

Housing permits in the Denver metro area increased 18 percent from 2015 to 2016, rising from 1,462 to 1,732 permits. As we can see in the first graph, this brings total permit activity back to levels similar to those found in 2004 and 2005, and well above what we saw during the recessionary period of 2008 and 2009:

As demand for both apartments and for-sale housing grew after 2009, we saw gradual increases in permit activity, and the permit total is now at a 14-year high. Permit totals have not been this high since 2002 when they reached 1,770. 

The composition of the permit total is very different today from what it was prior to 2007, however. As we see in the next graph, prior to 2007, the total number of single-family permits greatly outnumbered the number of multifamily permits. Since 2011, single-family and multifamily permits have been rather similar, with multifamily permits even exceeding single-family permits in 2012 and 2013. 

We can contrast this to the situation before 2007 when the very large numbers of new single-family permits from 1998 to 2005 were a factor in what became sizable declines in home prices from 2008 to 2010 that only made a quick turnaround on the back of massive federal monetary and fiscal stimulus in the wake of the 2008 financial crisis. Since then, the single-family market has remained well below its former peaks even though population growth continues as a sizable rate in Colorado. 

Much of this single-family activity has now been replaced by multifamily production. In fact, over the past five years, nearly half of new permits have been for multifamily housing, which is highly unusual:

Moreover, we see this show up in the homeownership numbers in Colorado. due in part to the boom in apartment building that has taken place since 2012, homeownership has gone into decline over the past decade. 

While homebuilders were quickly adding new supply, we saw the homeownership rate sit as historic highs above 70 percent. . 

Now, the housing focus has shifted more in the direction of multifamily, but overall permitting has  rebounded to 80 percent of where it was at the 2001 peak. Nevertheless, continuing growth in both home prices and rents suggests that there is still room for more housing production. 

Metro Denver rent growth falls to 3-year low in third quarter

According to new data from the Metro Denver Apartment Association, the average rent in the metro Denver area grew 5.9 percent from the third quarter of 2015 to the third quarter of 2016. That's the smallest year-over-year gain in the average rent since the second quarter of 2013.

The year-over-year growth rate has also been falling for the past five quarters. Year-over-year rent growth had reached an all-time high of 13.2 percent during the second quarter of 2015. Since then, the growth rate has gotten smaller each quarter, and as of the third quarter is now at a level not seen since the second quarter of 2013 when the year-over-year growth rate was 4.3 percent:

In the first graph, we see that rent growth had reached all-time highs last year, but things have since tapered off (the graph shows percentages):

At 5.9 percent, the growth rate for this year's third quarter is at a level that would have been considered very run-of-the-mill throughout the 1990s. Considering that new housing permits reached a 15-year high in metro Denver during October 2016, it may be that the period of surging rents in metro Denver is over for now. 

In the second graph, we see rent growth in non-inflation adjusted dollars over the past 35 years (the graph shows dollars): 

Although rent increases have been getting smaller, they do remain in positive territory, so we do see that the overall trend has certainly been upward. 

During the third quarter of 2016, the average rent in metro Denver was 1,358 dollars, which was up 5.9 percent from the third quarter of last year (when the average rent was $1,291), and down 0.2 percent from the second quarter (with an average rent of $1,371). It is very unusual, however, for the average rent to fall from the second quarter to the third quarter, further suggesting that the apartment market really is softening. 

Inflation-Adjusted Rents 

It is always a good idea to look at rental rates with an eye on the inflation-rate as well. In recent years, rent growth has generally outpaced the Consumer Price Index (CPI), and we see that is still the case as of the third quarter. (The CPI was up only 1.1 percent, year-over-year for the third quarter). However, we can see that rent growth, when we take inflation into account is less than it is in nominal terms. Adjusted for inflation, the average rent in metro Denver looks like this: 

As the CPI has been growing very slowly in recent years, we find little difference in the recent trend between the nominal numbers and the inflation-adjusted numbers. What's different in this case is the fact that rents can go down for years at a time  in real terms — as happened from 2001 to 2012. That has not the been the case since 2012, however, and even when adjusted for inflation, we find that rent growth has been substantial in recent years. However, as is the case with the nominal rents, the rate of year-over-year growth in rents has been falling for the past five quarters. 

The takeaway here is that rent growth continues to be positive, but the trend suggests we're already moving beyond last year's record-level rent growth and may very well be moving into a period of more moderate rent growth, especially in light of increased activity in single-family and multi-family construction. 

FHFA's Colorado Home Price Index up 9.5 Percent at end of 2015

According to the Federal Housing Finance Agency's "Expanded-Data" index, house prices were up 9.5 percent, year over year, during the fourth quarter of 2015 in Colorado. It was the lowest growth rate in four quarters, but still showed robust growth for what continues to be an upward trend in home prices for much of Colorado:

Overall, Colorado has seen growth rates of 8 to 10 percent for the past 13 quarters, although this doesn't quite match the growth experienced toward the end of the dot-com boom of the late 1990s. The YOY growth rate was 107. percent during the third quarter of 2015, and it was 9.4 percent during the fourth quarter of 2014.

Most of this was driven by growth in the metro Denver area and northern Colorado. Using the same index, we see that growth in the Denver-Aurora-Lakewood area showed a very similar pattern:

In this case, we see the pattern is the same although the growth rates are slightly stronger in metro Denver than for the state overall. This suggests less robust growth in the state outside the metro Denver area.

During the fourth quarter of 2015, the YOY growth rate was 11.8 percent. The growth rate was 13.2 percent during the third quarter of 2015, and 9.4 percent during the last quarter of 2014.

For now, there is no evidence of any significant softening in the market as of the end of last year. The most recent Case-Shiller home price data, for December 2015, showed little drop off from the 15-year highs that we've seen in that index in recent years.

 In a future post, we can look at FHFA index numbers for the smaller markets. For more information on the FHFA index, see here.

Denver-area multifamily housing permits peaked back in 2014

Measured in new building permit activity, multifamily building in the Denver-aurora metropolitan area appears to have peaked in 2014, and has been slowly declining since.

Using the Census Bureau's residential building permit data for this metro, we can look at how many permits were for buildings with more than one housing unit. In other words, this data is NOT for single-family houses, although townhouses are included. (This also includes for-purchase condos, so we're not talking only of apartments here.)

Since month-to-month swings are so large for these types of units, I've put it together looking at three-month moving averages (includes data up through December 2015). All the graphs in this article are for the Denver-Aurora metro area:

What we see here is that the 3-month average through December 2015 was 500 units which was down from the 3-mo average for November 2015, which was 713. This is all down from the peak of 983 units reached during October of 2014. Overall, we do appear to be seeing a slow downward trend that's been in place since the fall of 2014.

Generally, permit activity remains above what it has been over the past decade, although not equaling the huge multifamily housing boom that occurred at the very end of the dot-com boom back in 2001-2002.

Measuring the percent change year over year, we find that December's three-month average was down 37 percent, year over year. That's the largest drop recorded since August 2010, or 65 months ago:

In fact, 8 of the past months have shown negative growth by this measure, suggesting multifamily builders are definitely pulling back from the big-growth period that lasted from 2010 to 2013.

Building permits can be seasonal as well, although multifamily tends to be less season than single-family. However, let's look at the totals separated out by month so we can better take seasonal factors into account.

Looking at the 3-month average for December 2015 we see that the month's total of 500 was the lowest December total in 4 years, coming in behind the December total for 2012, 2013, and 2014. We find a similar trend with September and August, which were both also at a 4-year low. October 2015 was at a 3-year low for that month, and November was at a 2-year low for that month.  Overall, we can say that the second half of 2015 shows real declines in overall multifamily permitting activity.

The most recent vacancy and rent data for the metro area suggested that demand is softening, with the vacancy rate hitting a six-year high. There were questions about whether or not the industry had overbuilt. It's possible, although, even with condos included in this data, it seems that the industry has already been in the process of winding down from peak levels for more than a year. 

Metro Denver Rents and Vacancies: Vacancy hits 5-year high, rents flat

The apartment vacancy rate in metro Denver surged to a five-year high during the fourth quarter of 2015. According to the latest vacancy survey from the Metro Denver Apartment Association, the metro-wide vacancy rate during the fourth quarter of 2015 was 6.8 percent, which was the highest vacancy rate recorded since the fourth quarter of 2009 (measured in %):

Much of the increase in vacancy stemmed from vacancy rates over ten percent in Downtown Denver where an enormous amount of multifamily building has occurred in recent years. The vacancy rate was 5 percent during the third quarter of last year, and 4.7 percent during the fourth quarter of 2014.

Meanwhile, the average rent in metro Denver flattened off with a metro-wide average rent of $1,292 during the fourth quarter of 2015. The average rent was 1,291 during the third quarter of 2015 and 1,168 during the fourth quarter of 2014 (measured in $). 

Although the average rent was essentially unchanged from the third quarter to the fourth quarter of 2015, it remained up significantly, year over year. From the fourth quarter of 2014 to the fourth quarter of 2015, the average rent in metro Denver was up 10.6 percent. Yes, that's a drop off from the previous four quarters — all of which had YOY increases over over 12 percent — but a YOY change of over 10 percent still shows very strong growth (measured in %): 

And for those interested in the median rent, we don't see much of a difference in the trend here. The median rent did actually fall, however, from the third quarter to the fourth quarter, unlike the average rent. This fact does suggest, though, that what's driving the fall in rents is not just drops in the newest and most expensive units. Rents were falling in median-priced  units as well. If falling rents were being driven only in the most expensive units, we'd see more of a fall in average rents that was more comparative to the change in median rents (measured in $). 

Here are the two measures compared (in $): 

While the industry will likely scoff at the idea that there's any real softening in the market, the fact is it's too early to know how global trends will affect local markets. With collapsing oil prices affecting northern Colorado, and weakening economies in most of the US's biggest trading partners, including Canada, Japan, and China, there are reasons to be cautious. 

Real estate markets have continued to benefit from demographic changes, however, as population growth, and growth among the educated and employed have helped demand for real estate. 

Apartment Vacancy Rate Rises to Five Percent in Metro Denver

According to the Multifamily Vacancy survey from the AAMD, the vacancy rate for the third quarter in metro Denver was 5 percent. That's up from 3.9 percent during the third quarter of 2014. And it's also up from 4.5 percent during the second quarter of this year.

It's unlikely that this is a seasonal softening, as the third quarter tends to be one of the tightest quarters of the year in terms of rental housing. We can expect further softening during the fourth and first quarters coming up.

Five percent is what the report's original author, Gordon Von Stroh, used to call "the equilibirum rate," since it's the rate at which you wouldn't say that the market is either tight or soft. This is a change from most quarters in the last two years, though. One would certainly say that a vacancy rate of 3.5 percent is indeed a tight market, as was clearly the case last year. There does appear to be real softening in the market right now, though:

Note that the third quarter's rate of 5 percent was the highest rate recorded in six quarters. 

I like to compare the vacancy rate to the unemployment rate as well, since there has historically been a connection between the two. Naturally, a hot job market tends to lead to a tight rental market since more people can afford to go out and found a new rental household without the need for roommates. Thus, more households are created and more units demanded. We can see the two curves move together in most cases. 

 Thanks to sustained population increases in the metro Denver area over the past decade, the rental market tightened after 2010 even in the face of a very lackluster job market. As the unemployment rate declined, the vacancy rate moved quickly toward some of the lowest rates ever recorded.

The metro Denver vacancy rate rarely falls below 4 percent. Whether or not the current tight market can be sustained remains to be seen, however. As we'll see in other data, median household income growth in Denver has not been robust in recent years, and this will tend to put a damper on multifamily demand as people take on roommates or share quarters with other families. 

Metro Denver's Inflation-Adjusted Rents Hit An All-time high This Year

New third-quarter average rent data came out for metro Denver last month. The average rent hit a new all-time high during the third quarter of 2015. During the third quarter, the average rent in metro Denver, according to the Apartment Association of Metro Denver's vacancy survey, was $1,291. That's up from the third-quarter 2014 average rent of $1,145:

Year-over-year, the third quarter saw one of the largest growth rates ever recorded. During the third Q of 2015, the YOY change was 12.7 percent. That's down slightly from the second quarter's all-time highest growth rate of 13.2 percent:

Although this graph only goes back to 1988, we'd still find that recent YOY growth is the highest ever, even if we go back to the earliest data recorded by this survey (which was in 1982). We can safely say that we're now experiencing the highest levels of rent growth seen in thirty years. 

But what if we adjust for inflation? Is the rent really at an all time high? The answer is yes.  In this graph, I've adjusted the average rent data so that everything is in constant 2015 dollars: 

When we adjust for inflation, we find that real rents were fairly high even by today's standard during 2000 and 2001. Back in the 4th quarter of 2000, real rents had peaked at $1,085. They would not reach that level again until the 4th Q of 2013. Since then, rents have been regularly reaching new all-time highs. 

Also note that rents were going down in real terms between 2001 and 2009. Those were the days when, in real terms, your rent actually went down when you renewed your lease. For now, renters are facing some of the biggest rent growth ever, both in nominal terms and in real terms. 

This data is for multifamily rentals only. "Multifamily" means structures with more than four units.