Construction activity far from spike

The number of multi-family construction permits issued so far this year is at an eight-year high, but no one’s celebrating just yet.

The Pikes Peak Regional Building Department has issued 18 permits for developers to construct 407 multi-family units so far this year, the highest number of units approved annually since 2002.

In 2002 1,663 were approved.

“There’s no in-between in this town,” said Doug Carter with Sperry Van Ness. “The switch is either on or it’s off. We’re either building or there’s nothing happening.”

While some conditions indicate the county could be on the precipice of another building boom, many brokers believe this small permit surge is an anomaly for developers.

The 1,663 units built in 2002 outnumber the total permits issued since then. During some years fewer than 100 units were approved, and in 2009, no multi-family permits were issued.

Before that, numbers were healthy between 2000 to 2002.

Following those big building spurts in the early 2000s, vacancy rates surged and rent prices plummeted.

Vacancies stayed around 10 percent throughout the better part of the last decade and rents stagnated.

“There was no other market in the state where vacancy rates went up to 9, 10, 11, 12 percent and just stayed there,” said Division of Housing spokesman Ryan McMaken.

Other markets like metro Denver saw fluctuations during the last 10 years with fluctuating vacancy rates and rents. That didn’t happen here.

As people lose their homes to foreclosure; it’s harder to borrow money to buy single-family homes.  Soldiers are returning from war.  All that means that vacancy rates have fallen to their lowest levels in a decade – and rents are on the rise.

The division of housing reported that rental vacancies were about 5.8 percent in the first quarter of this year and up slightly to 6.4 percent in the second quarter.

The division hasn’t released third quarter vacancies yet. But Carter, who publishes his own Apartment Insights data about the local market and who is typically on track with the state report, found a 5.2 percent vacancy rate in Colorado Springs for the third quarter.

Those are low vacancy rates in any market, but especially in a market that’s seen double-digit rates long enough for a newborn baby to make it into the fifth grade. Some areas of town have seen rates go even lower. The North Central and Palmer Park neighborhoods have 3.7 percent vacancy rates, according to Carter’s report.

As vacancies have fallen, it’s stirred a long-quiet optimism in the city’s apartment development community.

This is the time when Colorado Springs would have started building in previous cycles.

However, the market is missing a single key ingredient – money.  There isn’t enough for affordable housing, and the biggest projects are focused on the luxury market.

Two of the biggest projects -the Peak’s at Woodmen near Woodmen and Union and the Vistas at Jackson Creek in Monument –  are luxury apartment developments, where rents will likely be the highest in the region.

They’ll have to be if developers are to justify the cost of construction, said Ron Spraggins with apartment brokerage Commonwealth. With average rents in Colorado Springs around 91 cents per square foot, these new developments will have to demand at least $1.30, Spraggins said.

For a 1,000-square-foot apartment that would be $1,300 a month, which is more than a mortgage on a $220,000 house would cost.

That’s why Spraggins isn’t concerned about overbuilding.  New construction is too expensive and financing is too hard to secure, he said.

Kevin McKenna, a senior advisor with Apartment Realty Advisors, agrees that the market will be able to control itself and keep from eagerly over-producing rental units.

“I’m not worried about there being an over-building of supply here,” McKenna said. “Times and economy were different in the early 2000s. Developers were a lot more optimistic. The sentiment is a little more tempered now. Developers aren’t counting on huge job growth and salary increases. I think it will stay in check.”

The spike in permitting activity isn’t that many units, especially not after nine years of almost no new construction, McKenna said.

“Anything is going to look like a dramatic jump after the last few years,” he said.

But 400 new units won’t likely make a big impact on the market.

“It would take thousands of new units,” Spraggins said.