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.

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