Friday, May 13, 2011

Analysis (Part I) 1st Q 2011 Statewide Vacancy and Rent Survey

This morning, we released the statewide vacancy and rent survey for the first quarter. In this first article on the report, we'll focus on the metro areas only. We'll look more at the rural resort areas later.

There are a few things we can learn from the first graph, which shows the vacancy rates in the various metro areas since 2001.

First, we can see that vacancies in general have been falling since the fourth quarter of 2009. Vacancies initially climbed with the recession's beginning in late 2008 but fell as households looked for alternatives to homeownership, and as the population continued to increase.

Although the vacancy rate has historically tracked with the unemployment rate, the effects of an elevated unemployment rate since 2008 have not been enough to overcome the demand for rental housing driven by solid household formation and by a diminished interest in homeownership.

We also note that two regions stand out from the others over the past decade. The first is Colorado Springs, where due to layoffs and troop deployments out of the region which uniquely affected the local economy, the vacancy rate remained higher than all other metro regions during much of the last decade.

And in Grand Junction, we see vacancy rates hitting very low levels throughout much of the decade due largely to a small economic boom resulting from oil and gas expansion. This expansion largely ended in 2008.

The chart also shows us which areas had the highest and lowest vacancy rates during each quarter. During the first quarter of this year, we see that the areas with the highest vacancy rates are Pueblo and Grand Junction. It is not a coincidence that these areas also have the highest unemployment rates among Colorado's metro areas. Job growth, among other things, drives demand for rental units, so these areas with the highest unemployment rates (both areas had rates of 11.2 percent in March)also showed the highest vacancy rates.

The Denver metro area (unemployment rate: 9.1 percent) and the Fort Collins-Loveland area (unemployment rate: 7.7 percent), which were among the metro areas with the lowest unemployment rates also showed the lowest vacancy rates.

Greeley, however does provide a challenge because although it had a 1st Q (March) vacancy rate of 3.8 percent, the area showed an unemployment rate of 10.6 percent. So, all things being equal, a higher vacancy rate would have been expected. This can be at least partially explained by the fact that Greeley (or at least western areas of Greeley) act as a bedroom community to Fort Collins and Loveland. In recent quarters, with a large amount of rent growth occurring in Larimer County, demand for lower-priced rentals have increasingly been rented by workers from Larimer county who are looking for more affordable rental alternatives. So, the vacancy rate in Greeley has at least in part been driven down by the relatively strong job market in Larimer County.

The second graph shows us year-over-year changes in average rents in all metro areas of Colorado since 2008. The graph suggests that rent growth is now clearly the strongest its been since 2008 during the period just prior to the financial collapse in the autumn of 2008. Most areas are now showing rent increases of nearly 4 percent. These annual changes in rent levels do not yet match the rent growth seen prior to the 2002 recession in Colorado, although the graph now shows a continued strengthening of rent growth in recent quarters.

Average rents continue to be flat in Greeley, however, and average rents may still be in a state of correction following the very large increases that were experienced in the final days of the oil and gas boom in 2008 and early 2009. However, even in Grand Junction, the year-over-year decline was less than 1 percent.