Shadow market drives vacancies in mountains
The overall statewide apartment rental market showed strength in the first quarter, with the vacancy rate for areas outside of Denver falling to 6.6 percent in the first quarter from 8.5 percent a year earlier, a 22 percent change. (For an earlier report, please visit Colorado rental vacancies fall )
But Colorado’s mountain communities, hammered by a sinister “shadow” market, showed an unprecedented year-over-year percentage increases. Hit hardest was Steamboat Springs, which saw its vacancy rate rising to 8.0 percent from 1.2 percent a year earlier, a whopping 567 percent increase.
Terrance Hunt, a partner and broker with the Denver office of Apartment Realty Advisors had noticed the huge jump in vacancy rates and looked into it on behalf of clients in areas from Summit County to Glenwood Springs.
“We investigated it and came to the conclusion it was the shadow market caused by people buying homes and condos, and they are unable to afford the mortgages so they are renting them out,” adding to the supply, Hunt said. The shadow market, in this case, includes condos and homes that buyers expected to use solely as second homes for ski vacations and weekend getaways, but now are looking to rent them year around, or risk losing them to foreclosure. Indeed, the shadow market can include foreclosed homes that investors and lenders are renting until the for-sale market recovers.
Subprime loans culprit
“They purchased these second-homes with subprime mortgages,” Hunt said. “Now, they have seen a big drop in their nest eggs and IRAs, and they no longer feel rich. But they had a different point of view a couple of years ago. The idea was to “Why not just buy real estate? Real estate is always a great investment.” During the “easy money” period it was almost as simple to buy a second home in the mountains, as it was to buy a primary home, he said. Because the financing was available, many people didn’t hesitate in buying a vacation property, he said.
Though Aspen saw the lowest percentage increase of the resort areas – with vacancy rates up 28.6 percent – even that extremely expensive mecca is feeling the pinch. And despite almost a 30 percent increase, Aspen’s overall vacancy rate remains low at a mere 2.7 percent vacancy rate. On the other hand, it was as low as 0.7 percent as recently as the first quarter of 2007.
“I have a client who has a ranch in Aspen, and she told me she used to be able to lease her ranch out over the Christmas week for $75,000 or $100,000,” Hunt said. “Not anymore. Last year, there were no takers at any price. When people flew in from LA or out-of-the-country, they stayed in a nice hotel instead.”
Ryan McMaken, of the Colorado Division of Housing, said a an apartment property manager told him the same thing is happening in Greeley. While Greeley’s vacancy rate rose by about 18 percent, McMaken said it would be a much stronger rental market, if there weren’t so many vacant second homes competing with the traditional rental units.
Still, McMaken noted that in the mid-2000s, many of the mountain communities had much higher vacancy rates than they do today. For example, the vacancy rate as 20.4 percent in Eagle County in the first quarter of 2004, compered with 6 percent today. And the vacancy rate in Steamboat Springs was 22.1 percent in the first quarter of 2006.
“Even though we’ve never seen these kind of year-over-year percentage increases before, to put it in perspective, they are still relatively low,” McMaken said. “There is nothing to indicate, at least in the short-term, that we are going to return to the kind of vacancy rates we saw back in 2004.”‘
Hunt said those large vacancies came in the wake of the high-tech boom and bust.
Perception of wealth vanished
“In early 2000, a lot of people had this perception of wealth,” Hunt said. “Their stock portfolios were going crazy, filled with high-tech companies. People started buying mountain properties, and the demand caused developers to build new products. But a lot of the new product was a little too late, and the bottom fell out of the condo market.”
He said some developers were “too late to the party,” completing their properties 18 to 24 months following the “tech wreck,” in March 2001, followed by the terrorist attacks on Sept. 11 of that year.
“The way to preserve the too late to be sold had to find a way to preserve as much equity as they could, and the way they did that was rent them out instead of selling them,” Hunt said.
But then the mountain rental markets rebounded. For example, after hitting 20.4 percent in 2004, a year later the vacancy rate in Eagle County had fallen by more than half to 9.2 percent, only to drop another 86 percent to 1.3 percent in 2008.
| Market | 1Q 2009 | 1Q 2010 | % Rate Change |
|---|---|---|---|
| Aspen | 2.1% | 2.7% | 28.6% |
| Eagle County | 2.1% | 6.0% | 186% |
| Glenwood Springss | 1.5% | 3.2% | 113% |
| Steamboat | 1.2% | 8.05 | 567% |
| Summit County | 2.7% | 4.9% | 81.5% |
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John Rebchook has more than 30 years of experience in writing and communications. As the Real Estate Editor for the Rocky Mountain News, he wrote about residential and commercial real estate for 26 years. He has won numerous awards for business stories and columns that he wrote, both as an individual and part of teams. In addition to real estate, he also covered economic development, banking and financing, the airlines, and cable TV for the Rocky. In addition, he was one of the original freelance writers for GlobeSt.com, covering commercial real estate for the Internet publication.!
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