Tuesday, August 2, 2011

Analysis: 2nd Q Colorado Springs vacancies and rents

According to new Colorado Springs vacancy and rent data released last week by the Colorado Division of Housing, multifamily rental vacancies rose slightly while rent levels increased to record highs.

The region-wide vacancy rate rose 10 percent from 5.8 percent during the 2nd quarter of 2011 to 6.4 percent during the second quarter of this year. As can be seen in the first graph, the year-over-year change in vacancies was positive during the 2nd quarter for the first time in nine quarters. 2009 and 2010 exhibited one of the most solid trend in declining vacancies reported in more than ten years.

However, the second chart, which shows the vacancy rate itself for each quarter, shows that although the vacancy rate rose during the second quarter, it remains near the ten-year low of 5.8 percent, and is well below what has been typical for the vacancy rate over the past ten years.

The fact that the vacancy rate increased slightly may be due to the fact that so many owners have been pushing up rents during the second quarter. In a tight market, large increases in rents often lead to temporary upticks in vacancy as tenants choose to move out rather than pay higher rents. This in turn pushes up turnover and vacancy. If demand remains high, though, the vacancy rate is likely to come back down.

What was most notable during the second quarter was the unusually large amount of rent growth that was reported.

The third graph shows the value of the average and median rents in each quarter. Notably, the average rent for the Colorado Springs area has not decreased since the third quarter of 2009. In each quarter since, the average rent has been flat or has increased from each quarter to the next, creating the longest period of sustained rental increases in ten years.

The region began to show some significant growth in both the median and average rent in 2010, and this trend has accelerated during the second quarter of 2011. Both median and average rents are now at record highs.

The region-wide average rent in Colorado Springs has increased for the past six quarters when compared to the same quarter the previous year. As can be seen in the last graph, the past three quarters have shown growth rates near or above 4 percent which suggests the sort of growth in average rents seen in Colorado Springs before the 2002 recession hit Colorado. At 5.5 percent, the year-over-year change in the average rent for the second quarter of 2011 was the largest change reported in more than ten years. The next largest year-over-year change was reported during the second quarter of 2001 when the average rent increased 5.2 percent over the second quarter of 2000.

This rate of increase is well above June's inflation rate (3.1 percent), and illustrates that rent growth in the region is notable, even when adjusted for inflation.

While the recent growth in rents and the declines in vacancy rates does not in itself prove continued demand for multifamily rentals in the region, the absence of any substantial amount of new construction of rentals in the area will contribute to ongoing rent growth and tightness in vacancies. Barring a large mobilization of troops out of the area, there will be sufficient population to sustain continued demand for rentals.

In addition, the relative unattractiveness or lack of accessibility to for-purchase housing at this time will reinforce this trend.

Note: The average rent information above is not adjusted for inflation. For information on inflation-adjusted rents, see here.

The vacancy and rent report also contains information on median rents. For more information on the differences between median and average rents, see here.