Apartment market at tipping point

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It has been a renter’s market in Colorado Springs for most of the last decade, but that’s about to change.

Demand for apartments and rental homes is up because homeowners whose houses have been foreclosed upon are renting now, and builders are holding off on constructing apartment complexes until the economy strengthens.

Rental vacancy rates fell to 7.2 percent in the fourth quarter, down from 8.7 percent in the same quarter of 2009, according to a study by the Apartment Association of Southern Colorado and the Colorado Division of Housing.

Also, it was the seventh consecutive quarter to show a decline in vacancies, and the lowest fourth-quarter rate since 2001.

The study’s author, Denver University Professor Gordon Von Stroh, said the ideal vacancy rate for both tenants and landlords is 5 percent, the level at which supply and demand are in equilibrium.

Apartment Realty Advisors Vice President Ken Greene expects the local market to fall to that level by the second or third quarter of 2011.

“Renters have benefited for the last 10 years, and now things are turning quickly in favor of the landlords,” he said. “The only question is, how far will we see this go?”

The falloff in demand for home ownership, brought on by the housing crisis, plays a role in the reversal, but rental supply has also dried up as the construction of new apartments in Colorado Springs has come to a come to a standstill.

“Lenders are gun-shy, they don’t want to make any loans (for new apartment buildings)” Greene said. “(Lenders) lag going into a recession and they lag coming out. It takes 18 months to build a new complex and another six months to get all of your permits, so any construction that starts now won’t be available for at least another two years.”

There is one project that is expected to break ground soon in Colorado Springs, a 230-unit luxury complex at Woodmen Road and Union Boulevard. The property is owned by Denver-based Southwestern Investment Advisors. President Mark Campbell said his firm was looking to build in order to stay ahead of the vacancy rate trends.

“There’s been so little construction (in Colorado Springs) that we saw it as an opportunity,” he said. “We knew there would be a long lead time and we figured we’d be out of the recession by the time it was ready.”

But he didn’t expect it to take this long.

Campbell has been working with the project’s developer, John McWilliams of Utah-based Talos Holdings, on obtaining financing for the apartments. The group applied for a loan two years ago and only recently received approval.

“The traditional financing of apartments through banks and other normal lenders doesn’t exist right now,” Campbell said. “The only loans available for new construction are through HUD (U.S. Department of Housing and Urban Development), and it’s an exhaustive process to get through. They’re buried with submittals from other developers in the region, and they’re the only lender in town right now.”

Campbell expects to close in the next few days on what will someday be the Peaks at Woodmen apartment complex. Construction would begin shortly after closing, and the group hopes to begin leasing in about a year.

But that’s only 230 units in a market of 44,000 rentals, and Colorado Springs is projected to see an influx of new renters entering the market. Troop draw-downs in Iraq and Afghanistan will bring military personnel back to the city in 2011, and the Army will soon decide whether an Aviation Brigade of up to 2,000 soldiers will be located at Fort Carson.

In addition, foreclosures have hit El Paso County hard. Those former homeowners make up a group of “involuntary renters” that are already flooding the market. The formation of new households in Colorado Springs is also on the rise, and the majority of these will be looking to rent.

“A lot of recent graduates have been living at home because of the economy,” Greene said. “But more and more are going out, and they’re generally not going to be buying.”

The resulting squeeze will mean higher prices for renters, a trend has already begun.

Median rent in Colorado Springs increased from $700.90 in the third quarter of 2010 to $711.12 in the fourth quarter, and Greene believes this is just the beginning.

“Median rent hasn’t been keeping up with inflation, so rents have effectively gone down in recent years,” he said. “Apartment owners will be pushing rents in hopes of making up for those years of falling rents.”

Concessions are one area where landlords will put the pinch on renters. In the past, building owners have had to offer free months of rent, small security deposits, rebates and other incentives to lure renters.

Rental losses from discounts and concessions fell to 9.1 percent in the fourth quarter of 2010.

“For (losses from discounts) to be below 10 percent is significant for this region,” Greene said. “As vacancies move down toward 5 percent, incentives will continue to go away.”

These swings make for an uneven market, and while landlords may benefit in the short-term, the imbalance will make it tough on renters and landlords alike.

“Things go way beyond equilibrium before they start moving back,” Greene said. “If the vacancy rate goes to 3 percent and rents go up dramatically, even owners don’t like to see that. That’s when tenants get mad and legislators start talking about rent control.”