THE STATE OF THE RENTAL MARKET – PIKES PEAK REGION
Aug 2024
Intro:
If you spend any amount of time reading posts and comments on any social media community page, there is a lot of confusion and misinformation about the rental market (in the Pikes Peak Region). Some will say that rents are skyrocketing (often this is tenants facing a renewal increase or real estate professionals/lenders who want investors to mindlessly believe that it’s always a good time to buy, without regard for your personal finances) while others might suggest that the market has cooled down. My singular goal in sharing today, as a 20-year 719-based property manager (and owner of a property management company), is to offer some objective, candid, and honest thoughts on the state of the rental market as someone who lives and breathes this business. How has the rental market shifted/changed since 2021, and what is happening today? Those are the questions I hope to answer. Note that much of this information will be single-family focused but I will also offer some nuggets of insight on the multifamily market.
The impact of COVID:
In 2021, the market saw a feeding frenzy. With much of the COVID fear and regulatory restrictions behind us, plus sizable checks written to individuals and businesses from the government, the “ant’s nest” was ignited; we saw a rental market like we have never seen before. EX: In the spring/summer of 2021, if we pulled comps (comparable rental data) on a unit showing a leased average of $1,500/mo, we could typically get $1,800-$2,000/mo, and that often happened inside of just a few days. On most properties, we had 2-5 applications. Demand was HIGH, and the market spiked so quickly that it was hard to find reliable comp data. We (as a community) were seeing much of the same in the sales market, which made life pretty difficult for brokers and appraisers.
The impact of rate changes:
In 2022, real estate mortgage rates increased substantially. This resulted in a wave of “accidental landlords.” Accidental landlords are individuals who had no plan to become landlords, but decided to because they either couldn’t sell the home for enough money or they simply didn’t want to lose their house with a nice low rate. After all, 2%-3% rates might not happen again in our lifetime and that asset is real. Inevitably, the supply of rental homes increased notably because of this which put a lot of downward pressure on rental rates; in some ways, we entered a rental market that was effectively opposite of what we were seeing in 2021. Note that before 2022 (or even 2021), the median DOM (days on market) of a rental would always hover at around ~15 days in the spring/summer and ~30 days in the fall/winter. After the rates increased and the influx of single-family homes started to flood in, DOM has increased on average by around 2-4 weeks, depending on the time of year and property type. This change in demand has impacted the market ever since. These days, a 2-3 month vacancy (or even longer if you aren’t willing to drop the price or are not pet-friendly) is not unheard of, particularly in the fall/winter.
The impact of inflation:
Inventory isn’t the only thing that’s changed; the impact of inflation has also been noteworthy. When going to the grocery store is ~25% higher than it was in 2020, not to mention every other expense necessary to survive, lower wage earners have REALLY felt the brunt of it. Because of this, for the first time in my career, the “cheaper” units (smaller multifamily units like duplexes or fourplexes) have struggled to rent quickly. Historically, rentals on the lower end (under $1,500/mo) rented very quickly, simply because they were the most affordable. While all property types have seen an increase in DOM (aka – downward pressure on rental rate increases) it’s these lower-end units (such as “class C” multifamily), often occupied by lower wage earners, that have been hit the hardest. Ex: We have fourplex units that were easily renting for $1,200/mo several years ago, that are now renting for $900-$1,000; for some of these properties this is a return to post-2020 pricing.
The impact of development:
Following the 2021 craze, many multifamily investors entered the market to develop new multifamily assets, feeling the risk would be worth the reward. Many of these buildings/communities are hitting the market this year (to the tune of around 10,000 units), has contributed to the challenges faced by owners of any multifamily property simply because of the laws of supply and demand.
While most people either want to live in an apartment or a house, meaning these markets are slightly separated, there are individuals who will rent either depending on the cost and convenience to their lifestyle. In other words, single-family homeowners aren’t as nervous about ~10k new units, but it does have some ripple effects on the single-family market as well.
In short, for the reasons mentioned in this article, both the multifamily and single-family markets are seeing an increase of supply.
What does this all mean?
This means that landlords must be a lot more conscientious and flexible, to keep their properties rented. If you spend any time on Google searching for stats on the Colorado Springs rental market, you will see lots of data on the rental market cooling. Here’s a quote from a quick search that aligns with what we have been seeing, “In the first quarter of 2024, the median rent dropped to $1,412, which is $31 less than the fourth quarter of 2022 and $56 less than the same time in 2021. As of April 2024, Apartment List reported a 2.5% decrease from the previous year.” Here’s another quote specific to single-family homes, “As of July 15, 2024, average rent in Colorado Springs has decreased by 0.4% over the past year, which is about $5 less per month. According to a May 2024 economic forecast breakfast, single-family rents in Colorado Springs are expected to drop to $1,427 per month in 2024, down from $1,438 per month in 2023.” [REF: Google AI Overview]
If you’re a landlord… is this still a great place to invest? Absolutely. While this might be more of an equity market than a cash-flow market, Colorado Springs is poised to really take off and to continue thriving for many years to come. While there are many mixed feelings about how positive that is, it certainly doesn’t hurt property values. Supply may be up, and demand may be down, but properties are still moving/renting. If you are responsive to the market and understand the long game, you won’t be upset that you invested in COS or held onto your home.
A random and slightly off-topic tip for landlords: Challenges are part of the game. Life is messy, humans are messy, and this will not always be seamless. If you aren’t able to find that headspace, are unable to financially weather market shifts, or are too emotionally attached to the property, it might be best to find yourself a buyer instead of a renter.
If you’re a tenant… this means you have more options. Gone are the days when we are getting 5 applications on every property. On average, you have more time to consider the property you want and who you wish to rent from. This also means you probably don’t have to apply at 5 different places ($). Additionally, negotiation is back. If a property is listed for $1,500/mo (and you know it’s been on the market for a minute) – maybe you should tell the landlord something like this, “I’m a good tenant that’s well qualified. After you’ve screened and approved me, would you take $1,400 on this property?” It doesn’t hurt to ask and some property owners are willing to flex for a quality renter.
A random and slightly off-topic tip for tenants: Understand that many landlords (I would use the word “most” if this was single-family specific) are not wealthy. They are simply trying to survive/thrive like everyone else, just like you will if or when you end up with an extra piece of real estate and want to leverage it. All property owners, regardless of their politics, faith, creed, or upbringing, will seek to rent their property for what the market is willing to pay. In 20 years of managing homes, I’ve never had a client tell me to rent their home for less than it’s worth (aka – what the market is willing to pay for it).
In closing:
The rental market will always ebb and flow from a tenant's market to a landlord's market, or vice versa, as all markets do. At this moment, the rental market and rental rates are not booming/jumping/spiking... or whatever word you want to use. If anything, the market is cooling/decreasing/normalizing. It is a tenant's market. If anyone tells you anything different, point them to a property manager with lots of grey hairs, if they have hair left at all.