Apt. builders brush off overbuilding concerns

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Despite fourth quarter apartment vacancy increases and rental-rate declines, Colorado Springs real estate insiders say the market is still on the upswing and will be able to support new development.

Year over year, fourth quarter vacancies in Colorado Springs apartments were down, according to two reports — a statewide report from the Colorado Division of Housing and a local report from Apartment Insights. Both also reported increased vacancy from the third quarter of 2011.

The vacancy rate of 6.7 percent reported by the division of housing fell from 7.2 percent in the fourth quarter of 2010 and rose from 6.2 percent in the third quarter of 2011. Apartment Insights reported a 6.43 percent vacancy rate, down from 6.79 percent in the last quarter of 2010 and up from the third quarter of 2011 when it was 5.2 percent.

Rents have ridden along the same trend lines. The division of housing reported that the average rent of $775 was up 5 percent from $738 in the last quarter of 2010 and down from $778 in the third quarter of 2011.

“I don’t think the overall direction has changed at all,” said Division of Housing spokesman Ryan McMaken. “The dip in the fourth quarter — I think that’s a seasonal issue. The fact that it didn’t go down at all last fourth quarter was the real surprise.”

He said the trend of lower vacancy rates and rising rents is well-established at this point.

“People don’t like moving during the holidays,” said Ken Greene, senior vice president for Apartment Realty Advisors. ARA teamed with the division of housing on its report.

For that reason, Greene said the fourth quarter is historically the worst for apartment property owners and the first quarter tends to be the second worst.

Doug Carter, a Realtor with Sperry Van Ness who prepares the Apartment Insights report, said the dip in the fourth quarter doesn’t always occur and he isn’t sure that the dip in the fourth quarter of 2011 was seasonal, but he still sees the news as positive and foresees vacancy rates overall continuing to fall and rents rising.

With Colorado’s apartment market booming, investors are coming from far and wide looking for deals, said Kevin McKenna, a broker with Apartment Realty Advisors.

“All the properties we’ve had on the market have had a lot of interest,” McKenna said. “A lot of people come to Denver and find they can’t buy there because it’s too competitive, so they go into Colorado Springs.”

Interest rates are low, which means selling prices can be higher and deals can still work, Carter said. And that’s one of many enticements for developers. If they can sell high after they build, there’s room for profit.

There are three apartment projects under construction in the region right now, including 230 units at Woodmen Road and Union Boulevard, 240 in Fountain and 177 units in Monument.

Nor’Wood Development group has proposed and started planning efforts for another 260 units in the Rockrimmon area, 260 at Woodmen Road and Powers Boulevard and 315 at the First and Main Towne Center off of Powers Boulevard. La Plata Communities is also proposing 128 units near its upscale Cordera neighborhood. That’s 1,610 units.

While the news is mostly good for apartments in Colorado Springs, many are asking if it’s good enough for that scale of development, Carter said.

Though the first three quarters of the year showed strong absorption — increase in the number of occupied apartments — the fourth quarter dip resulted in an annual absorption of just 172 units, according to Carter’s report.

If the absorption is the same in 2012, the 230 units at Woodmen and Union expected to begin leasing this spring and summer would be too many, never mind the Monument and Fountain projects.

Ron Spraggins, who owns apartment real estate firm Commonwealth, said the added 1,600 planned units on top of the whole region’s stock of about 32,000 by his count, which only includes buildings with 30 or more units, would make little impact.

However, most of those units are planned for the same northeastern submarket, Spraggins said.

“You could throw those units on top of the 11,342 in that northeast market and look at the physical occupancy you have there now and go from there,” he said.

Only some of the units in the area are new enough and nice enough to compete for the same tenants. But the new properties would likely draw tenants out of those slightly older properties, Spraggins said, resulting in a higher regional vacancy rate and negatively affecting rents.

But it all depends.

“The answer to every question is job growth,” Carter said.

If the economy improves and there are new jobs in Colorado Springs, people will be moving into the area and looking for places to live.

“The bottom line to everything, of course, is jobs,” Greene said.

If people are getting new jobs, they will create new households and move out of shared dwellings with family and roommates. Household creation in El Paso County was at historic lows in 2009 and 2010, Greene said. But it’s starting to bounce back.

And those newly employed are still reluctant to buy, Greene said. Young people, especially, don’t want to be tied down to a house. They want to feel like they can move to Seattle at the drop of a hat if they get a job offer. The cultural trend toward renting is another plus for apartment owners, he said.

Jobs will also have to come back if renters are going to be able to afford the high rents new construction will demand.

Greene said new units will cost $120,000 to $130,000 per unit to build. And the highest-end properties are only commanding rents of about $1.15 to $1.20 per square foot right now.

“Rent will go up,” Greene said. “It has to.”

Colorado Springs residents enjoy one of the lowest costs of living in the state, he said. The percentage of income spent on housing is much lower than it is in Denver, Boulder or Fort Collins. Greene and McKenna said they don’t expect that to last.

“People will have to get used to spending a higher percentage of their income on housing,” Greene said.

He doesn’t think the Springs will experience overbuilding.

While that has historically been what happens in Colorado Springs, Carter said he doesn’t see it happening this time either.

And Spraggins said the financing isn’t there for all the projects people are talking about building.

“If money was normal, developers would be building units on every corner,” he said.

Lenders are moving cautiously because they’ve seen the consequences of overbuilding, Greene said.

“The number of units that will actually get built historically will not be even close to what is announced,” he said. “And the timing usually gets pushed out.”

The 1,610 units planned may or may not happen, but if they do, many of them won’t come online until 2014.

McKenna said the market has traditionally absorbed 700 to 800 units a year and can handle proposed projects.

The market has even absorbed as many as 1,500 to 2,000 units, he said.

“We feel like the market can absorb it,” Greene said. “But until the shovels are really hitting the dirt, they’re kind of pipe dreams.”