Rental Concessions Price Drops Incentives Oh My

Should we be concerned about the health of the real estate market?

Anyone who follows my blog knows I have been “concerned” for a while. Of note I have been in the business for over two decades thus I have been through multiple market cycles.

Concerning the Rental Market it is no surprise we are beginning to see rental concessions i.e. free rent, lease signing bonuses, additional amenities and so forth. These concessions have been segregated to the deluxe and luxury segment of rental market, a segment that has witnessed a significant increase concerning inventory throughout the metro area. While concessions benefit the high-end renter in the short-term, the middle and lower-end of the market continue to experience demand far outstripping supply.

In addition I am witnessing a newer trend in the upper-end of the market. Those who may have considered placing their home on the market are now considering placing their home on the rental market, either long or short-term. The upper-end of the market i.e. over $500K is experiencing some fatigue as supply has increased and demand has decreased. Thus some sellers are reassessing their plans to sell and are considering renting their residences with the belief the market will again begin to increase at a later period.In the Cherry Creek North residential area adjacent to the Business Improvement District“For Rent” signs are sprouting up and beginning to crowd out or being placed adjacent to”For Sale” signs.

While the market may begin to uptick in the months to come I tend to be slightly pessimistic. Metro Denver has enjoyed an upswing for multiple years now. Over time markets do eventually correct. Historically housing prices matched the rate of inflation over the long-term. Since we have climbed out of the Great Recession our market has been expanding beyond national averages. Yes we are a pseudo sun-belt growth state with a continual influx of population however market forces eventually lead to corrections.

There is a fine line between demand and cost-of-living. While Metro Denver has enjoyed net migration since the oil bust of the last 1980’s, much of the attraction to Denver was affordable housing. Yes naysayers will advise the average home in Metro Denver is running about $330K in-line with average incomes yet most new inventory throughout the metro area is coming on line at much higher costs. The reasons are complex and varied, yet the end result is product becoming unaffordable to the average buyer.

Am I sounding an alarm? No. However I am advising clients to be cautious. I am finally seeing rationality return to the marketplace i.e. purchasing based on value versus a monthly payment and the realization that over the next 3-5 years equity appreciation may not be guaranteed as past performance is not necessarily indicative of future returns.

However I must advise, if priced correctly no matter what tier of the market, residences are in fact selling. Yet I am advising sellers to consider looking at prices from one year ago versus the last six months. While spring is usually a period of increased sales and activity, having witnessed longer days on market especially at the upper-end of the market, usually a harbinger of trends to come, thus tread carefully and with proper guidance.

Super Bowl Winners and their Home Values

Not sure what a statitician can interpret from the following: a review of past and present winners of the Super Bowl and the average housing value for their city/region. Of note for New England I used Boston SMA as a basis for valuation.

Super Bowl               Winner          Average Home Value 2015

I                                   Green Bay      $117,800

II                                 Green Bay      $117,800

III                                NY Jets            $610,700

IV                                Kansas City    $107,800

V                                  Baltimore       $109,700

VI                                Dallas              $134,200

VII                               Miami             $290,500

VIII                              Miami             $290,500

IX                                Pittsburg        $106,100


X                                  Pittsburg        $106,100

XI                                Oakland          $579,900

XII                               Dallas              $134,200

XIII                              Pittsburg        $106,100

XIV                              Pittsburg        $106,100

XV                               Oakland          $579,900

XVI                              San Francisco $1,118,600

XVII                             Washington   $497,800

XVIII                           Los Angeles    $562,800

XIX                              San Francisco $1,118,600

XX                               Chicago           $199,500


XXI                              NY Giants       $610,700

XXII                             Washington   $497,800

XXIII                           San Francisco $1,118,600

XIV                              San Francisco $1,118,600

XXV                             NY Giants       $610,700

XXVI                            Washington   $497,800

XXVII                          Dallas              $134,200

XXVIII                         Dallas              $134,200

XXIX                            San Francisco $1,118,600


XXX                             Dallas              $134,200

XXXI                            Green Bay      $117,800

XXXII                          Denver           $330,000

XXXIII                         Denver           $330,000

XXXIV                         St. Louis          $101,800

XXXV                           Baltimore       $109,700

XXXVI                         New England $478,000

XXXVII                        Tampa           $154,000

XXXVIII                       New England $478,000

XXXIX                         New England $478,000


XL                                Pittsburg        $106,100

XLI                              Indianapolis   $130,100

XLII                             NY Giants       $610,700

XLIII                            Pittsburg        $106,100

XLIV                            New Orleans  $339,740

XLV                             Green Bay      $117,800

XLVI                            NY Giants       $610,700

XLVII                           Baltimore       $109,700

XLVIII                         Seattle             $530,100

XLIX                            New England $478,000

L                                  Denver           $330,000



Is The Country Club Neighborhood Overheated

DSC_00791I honestly don’t know. However for a client request I decided to run some statistics. I pulled resales through the end of 2015 and compared on a per square foot price to the homes on the on the market at present.

I kept the comparison sample as close a possible as follows:

  • Houses priced/sold below $1,300,000.
  • Using only above grade measurements.
  • Avoid listings on busier streets i.e. Downing St., University Blvd., 1st and 6th Aves.
  • The Results:

The Closed Sales came in at: $446 PSF

Active on the Market at present: $481 PSF

Both on a percentage basis and actual sale price, I have some concerns. For example a 2,000 SF house based on the statistics during the 6 months from summer to today would have gone from $892,000 to $962,000. The difference in a mortgage payment is approximately $345.00/month or over $4,140/yr and .and extra $124,000 over the term of a 30-yr mortgage,

Granted, this is Closed  versus Asking, however sold prices have consistently been close to asking. My concern; will appraisals support the values beings presented during this 1st Quarter of 2016 (in general appraisals look backward not forward). Also, for those buyers purchasing at present will equity appreciation continue?

Of course we are in a low interest environment and while this morning’s unemployment rate was positive for the economy there are questions concerning slipping back into a recession based on world-wide economies.

Anyone who knows me knows I am always bullish on central Denver neighborhoods. I believe in location, location and location. However when I see 8% gains in 6 months and some justifying the gain, I become a bit more skeptical.


Is the rental market moving towards equalibrium

To be honest I have no idea. However according to The Denver Post in an article titled Rising Vacancy Rates Signal a Shift in Metro Denver Apartment Market  there has been a surge concerning vacancies. While this is not to be unexpected due to the massive supply having come on line in recent months, those like myself with some history in Denver are reading the tea leaves and the word pessimism keeps forming.

Denver real estate is not immune to boom and bust cycles. Since moving here in 1984 I have been through three (3) cycles of the market. What concerns me about this newest cycle is the following:

  1. Apartments (rental and condo) being constructed throughout the metro area based on pro-formas targeting deluxe and luxury market which is truly a finite market.
  2. Asking rents and PSF prices sans correlation to average income in the metro area.
  3. Assumption that demand will continue to outstrip supply (sorry folks we are not in New York or San Francisco).
  4. Increased Density in a marketplace which generally values personal indoor and outdoor space.
  5. Apartments with common area amenities while skimping on size; while attractive to millennials, guess what, millennials do age and their desires change.

Such cycles are old news. I still remember when Parkway Center and Uptown Village came on the market inclusive of rental incentives. For some perspective during the summer of 1987 (yes almost 30 yrs ago), I worked in downtown Denver for the summer while attending CU Boulder during the school year. I was able to rent an apartment at One Denver Place, a one bedroom on the 25th floor (unit #2507) with an unobstructed view of downtown, including parking and utilities. With my rental furniture bill, the monthly was approx. $500.00 which at the time was considered slightly above market. When I graduated CU and moved to Denver full-time my first apartment, an expansive one bedroom with an enclosed sun room at 900 Lafayette was a whopping $400/month. During these times there was a general glut of rentals on the market and rents were in line with average incomes.

Even in the early 1990’s as Denver began to climb out of the energy sector recession one was able to purchase units at The Barclay Towers downtown for $50K including parking and either mountain or city views coupled with below market financing provided by the sponsor/developer. Granted during this time LoDo was in its infancy, the loft trend had yet to gain traction and the Platte Valley was literally a dust-bowl, how times have changed.

Granted between natural inflation, an expanding population (yes folks even with the snow we are considered pseudo sun-belt) and other factors it is natural for prices to increase and trust me I look back and concerning some real estate purchases say to myself “Could Have, Should Have and Didn’t”. While hindsight is truly 20/20, history is known to repeat itself as we rarely learn our lessons.

With the many apartments and condos still to come on-line in 2016 and beyond (just look at the skyline of Cherry Creek North and west of the Denver Country Club) do not be surprised to see developers providing incentives and other marketing perks to increase occupancy.

As a broker working in the deluxe and luxury market niche I understand these clients are as mentioned are a finite resource. There are only so many out-of-state buyers and mountain residents  looking to drop $1M+ on a pied-a-terre condo in Cherry Creek North or $2,000+/month for a Manhattan sized apartment in downtown or Cherry Creek.

Looking at the macro picture long-term I am not as concerned about absorption. As baby-boomers age, condos and multi-family maintenance-free living becomes more attractive. Denver will always attract the youngest and brightest due to lifestyle, climate and an overall entrepreneurial orientation. However for the immediate future i.e. 1-3 years, I personally am a little concerned. If I were bringing such product out of the ground over the next 1-3 years I would be considering contingency plans from price correction to financing concessions to rental incentives to owner will carry.