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Page 8 — Multifamily Properties Quarterly — November 2021 www.crej.com Market Update T he recently released Apart- ment Association of Metro Denver’s third-quarter vacan- cy and rent report, which I co-authored with Colorado Economic Associates, shows contin- ued rent growth with a low overall vacancy rate. The average rent for the Denver metro area is now $1,726.36, with a vacancy rate of 3.8%. The third quarter showed a rent increase of $74.92 from $1,652.44 last quarter after a second-quarter rent change of $107.85. The average rent change year over year from 2020 is now at $204.70. This rent change represents a 13.45% increase for the year as of Sept. 10. The vacancy rate remains close to historic lows, and units con- tinue to be absorbed as they come available. The overall net absorption of units for the year, 14,365 unit, is the highest on record. Meanwhile the Case-Shiller hous- ing index for Denver is up 21% year over year (July to July), illustrating that housing prices have gone up faster than apartment prices, mak- ing it difficult for renters to become owners. Recently, many people have asked why we see such inflation in goods and services but not in the Consumer Price Index provided by the U.S. Bureau of Labor Statistics. More spe- cifically, how do we see only a 4.5% increase in the CPI if we have this type of inflation in local rents? Well, that takes some explaining. On Oct. 13, the CPI for the Denver- Aurora-Lakewood area was released for the period ending in September. Area prices rose 0.3% in August and September, up 4.5% over the year. Even higher prices within the index were seen for own- ers’ equivalent rent of residences (plus 0.8%), while the overall “shelter” component also was up 4.5% for the year. This category of shelter within the CPI is not what one may initially think of when experienc- ing rental or hous- ing price increases. The price changes in housing are con- sidered investment or capital and not “consumption.” Shelter is the cost to provide the ser- vice of housing, whether that is the rental cost of an apartment or what the rent equivalent of an owner- occupied home would be if rented. So, shelter is the measure of hous- ing consumption in the CPI, what is called the service flow of housing, not the price change of housing. The shelter component represents approximately one-third of the CPI index and is comprised of subcat- egories. The two main subcategories of the shelter index are the owners’ equivalent rent of primary residence (23.8% of CPI) and rent of primary residence (5.9% of CPI). The owners’ equivalent rent measures home- owners’ estimated expected rent if renting their homes in the current market, while renting of primary is a direct measure of rent paid. The remainder of the shelter index is made up primarily of lodging away from home expenditures, such as hotels and housing at school. This portion of the shelter component comprises approximately 6% of the CPI. Apartments are not a focus of the CPI index. Apartment rents appear to be the most direct measure of the consump- tion of housing but not a focus of the CPI. Further criticisms of the shelter component include: homeowners’ tendency to mis-estimate rent equiv- alents because they are not actively renting; mismeasurement of long- term rentals not reflecting current rents; and the data within the CPI is lagged, not representing current conditions, and the shelter sampling is not monthly as other components, contributing to a lag and potential corrections to the shelter component. The BLS argues that rent changes are rather infrequent. For the CPI pro- gram, rent data from each sampled unit is collected every six months. The logic is that collecting rent data less frequently allows a much larger sample. Knowing what is now experienced in the apartment and housing mar- ket in general, we can expect CPI- related price increases for the shelter component to remain and increase going forward, which means the cur- rent effects will not be completely “in the numbers” until late spring-early summer 2022. This calls into ques- tion the claims of “transient” infla- tion because inflation measurements can be lagged and thus show up later. Many analysts prefer to have more granular rent data collection meth- ods that are frequent and have larger local sample sizes – such as those used by multifamily data collectors and in particular surveys that have high response rates, coupled with sampling down to the smaller unit counts (two- to four-unit communi- ties). This allows for better analysis of rental effects for various classes of buildings (A, B, C) as well as issues facing smaller landlords and owners. They believe apartment rent data is a direct measure of shelter consump- tion. AAMD’s Denver Apartment Vacancy and Rent Survey has approximately a 40-year history of local, broad-based, granular data. Apartment rents mea- sured in 1981 were at an average rent of $336 vs. today’s average rent of $1,726.36. This represents a long-term increase of $1,390, or approximately 10% per annum, while the Denver CPI index annual rate over this same period is approximately 5%. Apart- ment rent changes historically have revealed themselves as nontransitory and persistent. Apartment surveys do not reveal rent crashes or spikes with a return to a mean rent per unit but rather show short-term rent changes or concessions during economic events. A percent rent change rather than some other price change such as CPI over a period is the best mea- sure available. But one thing is for sure: The average Denver consumer has experienced an increased cost of living as Denver has emerged as a major city, coupled with the current inflationary environment. s rthroupe@du.edu Understand the data behind rent tracking statistics Ron Throupe, Ph.D. Associate professor, Burns School of Real Estate & Construction Management, Daniels College of Business, University of Denver, and state chairman, Counselors of Real Estate