What is Behind the Current Apartment Market? Demand and Supply Dynamics Apartment Association of Metro Denver January 26, 2011 Gordon Von Stroh, Ph.D. and Ryan McMaken

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Current metro Denver vacancy info is available through the Apartment Association: http://www.aamdhq.org http://www.aamdhq.org// Historical information on metro Denver vacancies is available through the Division of Housing: http://dola.colorado.gov/cdh/index.html http://dola.colorado.gov/cdh/index.html Current and historical vacancy reports for the balance of state and more are at: http://dola.colorado.gov/cdh/index.html http://dola.colorado.gov/cdh/index.html The Division of Housing regularly posts updates and analysis of economic data related to housing at the Division’ Division’s Housing Blog: http://divisionofhousing.blogspot.com http://divisionofhousing.blogspot.com//

Vacancies are now at very low levels. This is the lowest 4th Q rate since 2000.

Metro Denver unemployment vs. apt. vacancy rate 14

9 8

12

7 10 6 8

5

6

4 3

4 2 2

2001q1 2001q2 2001q3 2001q4 2002q1 2002q2 2002q3 2002q4 2003q1 2003q2 2003q3 2003q4 2004q1 2004q2 2004q3 2004q4 2005q1 2005q2 2005q3 2005q4 2006q1 2006q2 2006q3 2006q4 2007q1 2007q2 2007q3 2007q4 2008q1 2008q2 2008q3 2008q4 2009q1 2009q2 2009q3 2009q4 2010q1 2010q2 2010q3 2010q4

0

1 0

Historically, there is a nice correlation between unemployment rates and vacancy rates. This correlation breaks down after mid-2009. Demand continues to grow in spite of little job growth.

10

1,360,000

9

1,340,000

8

1,320,000

7

1,300,000

6

1,280,000

5

1,260,000

4

1,240,000

3

1,220,000

1 0

Vacancy rate Total employment Jan 07 Mar07 May07 July07 Sep07 Nov07 Jan08 Mar08 May08 Jul08 Sep08 Nov08 Jan09 Mar09 May09 Jul09 Sep09 Nov09 Jan10 Mar10 May10 July10 Sept10 Nov10

2

1,200,000 1,180,000 1,160,000

Here we see the same correlation applies to total employment also. The arrows historically go in opposite directions, but after mid-2009 BOTH total employment and the vacancy rate go down. Historically, declining vacancy is fueled by job gains, but not now.

Retail, Leisure and Hospitality jobs in Colorado (in 1000s)

280 270 260 250 240 230

Leisure and Recreation Retail

210

Jan 07 Mar07 May07 July07 Sep07 Nov07 Jan08 Mar08 May08 Jul08 Sep08 Nov08 Jan09 Mar09 May09 Jul09 Sep09 Nov09 Jan10 Mar10 May10 July10 Sept10 Nov10

220

As an aside, we note that the cohort of renters aged 18-26 are not doing any better on the job front than others. Among the young, unemployment is around 25%. The service sector jobs, which are common among renters, have also been in decline.

New households formed in Colorado 70,000 60,000 50,000 40,000 30,000 20,000 10,000 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

0

A reason that vacancy continues to fall is because of strong household formation.

Metro Denver permits vs. new households New HH Total MF Total SF Rental Units delivered

30000

25000

20000

15000

10000

5000

0 1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Here we compare new permits issued with household formation. According to some industry professionals, 5 new households drives a need for 1 new multifamily unit. This would mean a minimum of 3000 units should have been built in 2009 (and so on.) The region has not built enough multifamily units to keep up in recent years.

Variations in the vacancy rate will tend to fade as vacancies are filled as tenants look for empty units in even less desirable areas.

40000 35000 30000 25000 20000 15000 10000 5000 0

1200 34,200

1100 28,198

777

Real Incomes Real Rents

1000 900 800

712

700 600

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Years

Average rents have not kept up with inflation but neither have incomes.

Monthly Rents

Yearly Incom es

Metro Denver Rents Vs. Incomes

Renter and owner median incomes (inflationadjusted) $80,000 $70,000 $60,000

Renter median incomes Owner median incomes

$50,000 $40,000 $30,000 $20,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Incomes are projected to fall.

Rental losses have come down from peaks, but remain high by historical standards.

4000

3500

3000

2500

2000

1500

1000

500

0

6-month moving average of foreclosures

Sales at auction Filings

Foreclosures are also a reason that vacancies continue to fall in spite of weak jobs gains.

June July August Septem ber October Novem ber Decem ber Jan-09 February March April M ay June July August Septem ber October Novem ber Decem ber Jan-10 February March April M ay June July August Septem ber October Novem ber Decem ber

Colorado foreclosures 50000

Filings Sales at auction

45000 40000 35000 30000 25000 20000 15000 10000 5000 0 2003

2004

2005

2006

2007

2008

2009

2010

While the last slide shows foreclosure totals falling in recent years, foreclosure totals are still at historical highs.

A large benefit to apartment owners is the fact that the number of home purchases has declined. Note the downward drift and note the collapse in transactions that occurred after the end of the tax credit in mid-2010.

This shows that even compared to 2009, the second half of 2010 for home sale transactions was negative.

16

14 12

10 8

6 4

2 0

SF/Condo Vacancy compared

SF/Condo vacancy

MF vacancy

14

12

10

8

6

4

2

0

The number of single-family rentals tends to be lower than multifamily and is at the lowest level yet recorded.

2003q1 2003q2 2003q3 2003q4 2004q1 2004q2 2004q3 2004q4 2005q1 2005q2 2005q3 2005q4 2006q1 2006q2 2006q3 2006q4 2007q1 2007q2 2007q3 2007q4 2008q1 2008q2 2008q3 2008q4 2009q1 2009q2 2009q3 2009q4 2010q1 2010q2 2010q3 2010q4

Absorption is at the 4th highest level yet recorded.