Apartment Market Shows Signs of Improvement

"It's only two-tenths of a percentage point, but the vacancy rate almost always goes up in the fourth quarter from the third quarter," says Gordon E. Von Stroh, author of the report and a professor at the Daniels College of Business at the University of Denver. The vacancy rate also was down from a year earlier, when it stood at 11.7%. But it's far worse than it was in 2000, when it stood at only 4.7%.

Von Stroh's reports shows that four of the six counties showed an increase in their vacancy rates while two showed a decrease. And 17 submarkets showed a decrease while 20 showed an increase. The moderate improvement likely was caused by a few more jobs being created locally, fewer new units being added to the market and landlords offering concessions, Von Stroh and other experts say.

Even mild weather helped the market, notes Tom Lunistra, president of Apartment Finders International and one of the sponsors of the survey. But as long as mortgage interest rates stay low, people will continue to leave apartments to buy homes, he says.

The average rental rate decreased to $814.54 per month in the fourth quarter, down from $814.85 for third quarter 2003 and up from $1813.92 a year earlier. However, the average rents do not include the cost of rental discounts, concessions, models, bad debts and delinquencies. During the fourth quarter, the concessions and other factors were the equivalent to a 12.2% discount, down from 17.4% in the third quarter.

Lunistra says landlords who had been giving two months of free rent on 12-month leases now are simply dropping the monthly cost over the entire year. After getting two months of free rent, it was hard for renters to begin paying in the third month, he says. Also, renters were increasingly just walking away from rent, looking for other free deals, he says.

Since the market softened three or so years ago, some experts, such as Jeff Hawks, principal of Apartment Realty Investors, have contended that building owners are better off cutting rental rates than offering free rent. In the long run, buildings will retain their values better if they cut rates and not offer free rent, he says.

Meanwhile, out-of-state buyers increasingly are showing interest in the Denver-area apartment market, believing it is at the bottom and will slowly improve from here, says Steve Rahe, an apartment broker with CB Richard Ellis. "I get three to four calls a month from investors looking to buy here," Rahe says. "Investors are optimistic about the market, but so are owners. We continue to have far more buyers than sellers."