Rent growth in Metro Denver falls to 4-year low in 4th quarter of 2016

According to the latest data from the Apartment Association of Metro Denver, the average rent in Metro Denver during the fourth quarter of 2016 was $1,347, which was down from the third quarter average rent of $1,368.

The fourth quarter's average rent was up from the fourth quarter of 2015 with the average rent rising 4.2 percent from $1,292.

With a year-over-year increase of 4.2 percent, however, average rent came in at the smallest year-over-year increase since the first quarter of 2013, when the average rent grew 4.1 percent:

Rent growth has been falling for the past six quarters after reaching a record high of 13.2 percent during the second quarter of 2015.

The average rent has also fallen, quarter over quarter, for the past two quarters. After hitting $1,371 in the second quarter of this year, the average rent fell to $1,368 during the third quarter and then to $1,347 during the fourth quarter:

If we adjust for inflation, we see a similar trend, although we can note that in real terms, the average rent fell between 2001 and about 2011:

Flattening rents are likely a result of substantial increases in new housing construction that took place in metro Denver since 2012. In October 2016, for example, new housing permits reached the highest level recorded since 2001. 

Not surprisingly, we also find that vacancy rates have increased as well. During the fourth quarter, the metro Denver' vacancy rate rose to 6.2 percent, which was up from the 3rd quarter rate of 5.1 percent. 2016's fourth quarter rate was down, however, from the vacancy one year earlier. The vacancy rate had surged to 6.8 percent during the fourth quarter of 2015, but fell again during the first quarter of 2016. Nevertheless, 2016's fourth-quarter rate of 6.1 percent is the second-highest vacancy rate recorded since 2010. 

All of this points toward some stabilization in the market, although there is still little to indicate that we're entering a bearish market in multifamily housing, barring a sizable economic shock to employment or incomes.

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. 

Colorado Springs average rent grows by all-time high of 10.2 percent

During the second quarter of 2016, rent growt hin Colorado springs hit an all-time high of 10.2 percent, bringing the average rent in the metro area to 991 dollars, which is also an all-time high. That's up from the first quarter  of this year when the average rent was 959. The average rent during the second quarter of last year was 899 dollars.

According to data released by the Colorado Division of Housing, the average rent in Colorado Springs continues to grow at a historically high rates:

The last time the average rent grew at a similar rate was during the dot-com boom at the very end of the 1990s. If we look at the average rent over, time, we find that the general trend has, not surprisingly been upward, but has increased more rapidly over the past five years than was the case during the previous decade:

Looking just at nominal rent levels, however, can be misleading, and if we adjust for inflation using the nationwide CPI, we find that rents actually went down in real terms from 2003 to 2009. While there was some growth from 2009 to 2013, we see that even in inflation-adjusted terms that rent growth has picked up since 2014. Real rents only surpassed the 2001 high in 2014 following a long period of flat rents. Now, however, inflation-adjusted rents have surpassed the old 2001 peak, and have set several new all-time highs in recent quarters:

As one might expect, this year's robust rent growth reflects low vacancy rates. While not setting any records, the vacancy rates for Colorado Springs over the past year have been generally rather low, with the vacancy rate even dipping below five percent twice over the past two years. (A vacancy rate below five percent is generally regarded as "low".) In any case, recent vacancy rates are among the lowest we've seen since the dot-com boom days, and certainly among the lowest we've seen over the past decade.

Finally, we should note that vacancy rates and rents can be significantly affected by seasonal issues, with the fourth quarter often showing the softest markets each year, with the third quarter often showing the strongest markets. 

So, it can be helpful to compare vacancy rates to the same quarters in previous years. In the final graph, we see the second quarter of this year compared to previous years. 2016's second quarter vacancy rate was higher than the previous year, but nevertheless remains near a ten-year low. 

With some of the highest foreclosure rates among metro counties in Colorado, and with a fairly sedate job market compared to Denver and northern Colorado, Colorado Springs has been more slow to experience strong price growth in housing. However, over the past two years, it has become clear that Colorado Springs is now seeing unusually high growth in rents and housing demand. Future rents will depend partially on new housing construction, and we'll look at that in a future post.

Colorado Springs apartment vacancies remain near 14-year lows

During the third quarter of 2015, the average multifamily vacancy rate in Colorado Springs dipped to 4.2 percent, which was the lowest vacancy rate recorded since 2001.

During the fourth quarter of 2015, the vacancy rose slightly to 5.0, but remained down from the fourth quarter of 2014, which had a vacancy rate of  5.3 percent:

Clearly, the overall trend has been downward since 2004. In fact, the vacancy rate even went down in the midst of the 2008-2009 financial crisis. This was unusual because vacancy rates typically increase when unemployment increases. However, in Colorado Springs, the declining vacancy may have reflected a flight from homeownership to rental apartments in the wake of high foreclosure rates. 

In order to check for seasonal factors, we can also separate out the quarters to see how 2015's fourth quarter compares to other fourth quarters. As expected, it turns  out that 2015's fourth quarter was the lowest vacancy rate found in any fourth quarter over the past decade: 

Rich Laden reports in the Colorado Springs Gazette:

Several factors are driving rent increases, industry experts have said. Even as historically low mortgage rates make homebuying attractive, many people want to live in apartments. In particular, mobile-minded young people - so-called millennials - don't want to be tied to a mortgage and are driving demand, experts have said. Empty nesters who are downsizing and want maintenance-free living also are a part of the mix of renters. At the same time, the construction of Springs-area apartments isn't necessarily keeping pace. From 2012 through 2015, nearly 2,800 units were built and added to the overall supply of apartments for rent, the Housing Division and Apartment Association report showed. And yet, an additional 3,366 apartments were rented and occupied during that four-year span.What's more, apartment construction during the recession years was minimal; only 778 new units were added in the Colorado Springs area from 2007 through 2011.

For more on this, see our previous articles here at ryanmcmaken.com: "Colorado Springs permits hit four-year low" and "Colorado Springs: New housing construction not keeping up with household creation."

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.

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: Average Apartment Rent Growth Sets New Record During Second Quarter

Third quarter multifamily vacancy and rent data will be coming out in a about a month, but let's have a closer look at the second quarter's numbers. If current trends are any indication, the third quarter — which tends to be the strongest quarter of the year for multifamily — will be another period of low vacancies and high rent growth.

The first graph shows the overall apartment vacancy rate in metro Denver through the second quarter of this year. The rate was 4.5 percent for the second quarter. that's down from the first quarter rate of 4.9 percent, and down from 4.7 percent during the second quarter of 2014. So, vacancies are low, given that 4 percent is pretty much as low as the vacancy rate ever goes in the metro area. From a tenant perspective, it's about as easy to find an apartment now as it was during the final days of the dot-com boom:

And when vacancy rates get low, we generally expect rent growth. But this time around, we're seeing some of the largest rent growth we've ever seen since the survey was first initiated in the early 1980s. The average rent in metro Denver during the second quarter was $1,265, which is the highest rent ever recorded in nominal terms. It's also the highest rent ever recorded in real terms, but I'll have to adjust the rents for inflation in a future post. The current acceleration in rents outpaces the 1990s:  

In fact, the past three quarters, when measured in year-over-year comparisons, show by far the largest YOY growth in rents ever recorded.  The second quarter's average rent of $1,265 was up an enormous  13.2 percent from the second quarter of 2014 when the average rent was $1,117. The YOY increase was over 12 percent for both the fourth quarter of 2014 and the first quarter of 2015:

Thanks to continued in-migration and a relatively small amount of new single-family construction, multifamily housing remains the most feasible option for many households. Those seeking affordability will move outward from the urban center to more affordable C-class units in further out neighborhoods. Some households will double up or take on roommates. 

The population growth data, though, won't come in for a year after the fact, so it's hard to know to what extent a lack of affordability is impacting in-migration at this time.

Compared to to other markets, the Denver market is experiencing some of the highest rent growth rates in the nation. But, of course, rent level remain well below those in San Francisco. 

Note: The report also tracks median rent, although, at this time, there is no significant difference in the trend between median rents and average rents. the median rent during the second quarter of 2015 was $1,225, which was up 14.7 percent from the 2nd Q 2014 median rent of $1,067. The median rent during the first quarter of 2015 was $1,203.

Chart of the Day: Rent growth hits record highs in Metro Denver

The Metro Denver Apartment Association released first quarter 2015 vacancy and rent data late last  month, and we find that year-over-year rent growth hits exceptionally high levels for the second quarter in a row. The average rent during the 1st Q 2015 was $1,203, compared to $1,073 one year earlier. During the 4th Q of 2014, the avg rent was $1,168

The first graph shows the average rent for all quarters recorded since the survey was initiated in teh early 1980s by Gordon Von Stroh. Obviously, rent growth since 2012 has been significant. If we just eyeball the graph, we can see that the rate of growth in recent years has outpaced most other periods. Even during the late 1990s during the tech boom, rent growth was not as strong as it is now. These numbers are not adjusted for inflation, and during the period from 2003 to 2009, rent barely exceeded the CPI growth rate during many periods. But, rent growth is now well in excess of CPI growth.

If we want to really quantify just how strong rent growth has been, we can look at the year-over-year change for each quarter. The next graph shows this, and we see that for the 4th Q of 2014 and the 1st Q of 2015, rent growth is the highest is has been in 30 years. During the 4th Q 2014, the YOY change was 12.19 percent, which is now the highest YOY increase ever recorded. During the 1st Q 2015, the growth rate came down slightly to 12.11 percent. But, it's a little silly to talk about these estimates out to the hundredths place, so to be more realistic, we can just say that for the past two quarters, rent growth has been tied at a record high of 12.1 percent.

And why so much rent growth? Demand is high. The vacancy rate for metro Denver during the 1st Q 2015 was 4.9 percent. That's up from the fourth quarter (which tends to be a high-vacancy quarter) but year over year, the 1st Q's vacancy rate was below 2014's 1st Q rate of 5.1 percent. For the past four quarters, the vacancy rate has been below five percent, which is quite low for this market. Looking at the past thirty years, we see that vacancy rates are near very low levels, although not where it was during the very tight late 1990s.

But if the vacancy rate is not at record low levels, why is rent growth at record high levels? Part of it is due to the fact that most of the new product is luxury or fairly high end product. (This is average rent and not median rent, so the number are skewed up slightly by very expensive new product. Median rents, however, show similar trends.) Also, with so few homes for sale due to fairly lackluster rates of new home construction and low inventory, there are few options renters have outside renting. Thus, rents continue to move upward rapidly.