CREJ

Page 4 — Multifamily Properties Quarterly — November 2021 www.crej.com Market Update F or the first few months after the pandemic began, partici- pants in the apartment market had virtually no clue what to expect. Previous recessions had caused significant market down- turns and with the unprecedented nature of government-mandated shutdowns, the fear of the unknown was worse than reality. It was under these circumstances that many own- ers and managers began taking steps simply to keep “heads on beds.”The initial reaction was to push pause on rent increases and do anything neces- sary to ensure that occupancy didn’t suffer. In suburban submarkets, that meant holding rents steady, while in central/ core markets, that meant offering concessions, thereby reducing effec- tive rents. Prior to the pandemic, there was a significant gap between average market rents and affordable rents. However, during previous downturns, market rents, especially at older vintage properties, fell to levels near or below the maximum allowable affordable rents, causing some afford- able residents to move out of their rent-restricted units and into market rent units, which are usually better amenitized. In the past, this not only caused affordable properties to lower their rents below maximum allowable rents, but also it caused an increase in vacancy. During the first months of the pandemic, market participants were left wondering if the same thing would happen again. Some owners and managers were convinced that any downturn as a result of the pandemic would be short-lived and the recovery would be strong and relatively quick because the factors negatively affecting the market were atypical. Never before had the economy been “vol- untarily” shut down and started back up again. After the initial shock and the resulting soft- ness in the rental market over the next 12 months, the major apart- ment markets along the Front Range came charging back in the second quarter. In fact, the second quarter saw quarter-over-quarter and year- over-year records in many categories, including both gross and effective rent growth, as well as vacancy reductions and absorption gains. Surprisingly, suburban rents had continued to grow during the pandemic, and then surged higher during the second and third quarters. And while rents in the cen- tral/core submarkets did soften, they largely returned to prepandemic levels during the second quarter and moved higher during the third quarter. In addition, one metro area fared better than others during this time. While both the Denver metro area and Northern Colorado markets were similarly negatively affected by COVID-19, reviewing charts of the performance of the Colorado Springs market would cause an analyst to ask, “What pandemic?” The third-quarter results brought more of the same.While the second quarter was the best performing quar- ter in the 17 years of the Apartment Insights survey for the Denver metro area, the third quarter came in at a close second, even exceeding the previous quar- ter’s record rental increase by $20. The third quarter also posted the highest annual absorption ever in the Denver metro area and the second-highest quarterly absorption ever – all while vacancy declined to just below 4.5%. In Northern Colorado, the strong momentum from the sec- ond quarter also continued, posting solid gains in absorption and rent growth while pushing vacancy down below 4%. Records during the third quarter included the highest annual absorption and largest quarterly increase in gross rent. Finally, in Colo- rado Springs, rents continued to surge upward. Excluding the previous quar- ter’s record rental increase in excess of $100, the third-quarter’s increase was just shy of doubling any previous quarterly gain. Adding the last two quarters together, rents in Colorado Springs exploded upward by more than $180, or by 15% in six months. Despite these recent gains, rents in Colorado Springs remain below those found in Denver and Northern Colo- rado. So how do market rents compare to affordable rents in each of these areas? The average effective market rent in the Denver metro area in the third quater is $1,728 per month, while the maximum affordable rent at 60% of the area median income is $1,179 for a one-bedroom (a $549 dif- ference) and $1,416 for a two-bedroom (a $329 difference). In Northern Colorado, the average effective market rent is $1,500, while the maximum affordable rent at 60% AMI is $1,080 for a one-bedroom (a $420 difference) and $1,296 for a two- bedroom (a $204 difference). Maxi- mum affordable rent inWeld County at 60% is even lower – $996 and $1,195, respectively. Finally, the aver- age effective market rent in Colorado Springs is $1,417, while the maximum affordable rent at 60% AMI is $927 for a one-bedroom (a $490 difference) and $1,113 for a two-bedroom (a $304 dif- ference). It should be noted that these differ- ences don’t take into consideration the fact that the average market rents generally assume tenants pay for all utilities, while the maximum afford- able rents shown assume all utilities are included in rent. Adjusting for this, the difference between market rents and affordable rents becomes even larger. Based on this large difference between current market rents and maximum allowable affordable rents, it is difficult to fathom a scenario in which market rents would fall to a level that would compete with afford- able rents, even at older, less expen- sive vintages. As such, we predict that affordable rents will continue to remain well below market rents in the major apartment markets throughout Colorado. s Post-pandemic market & affordable rents changes Scott Rathbun President, Apartment Appraisers & Consultants Inc. Cary W. Bruteig, MAI Principal, Apartment Appraisers & Consultants Inc.