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January 2015 — Multifamily Properties Quarterly — Page 17
“O ne doesn’t discover new
lands without consent-
ing to lose sight of the
shore,” said Andre’ Gide,
Nobel Prize winner in
1947. As we roll into 2015 in the
Denver multifamily market, both
long-term investment veterans and
rookies alike are amazed by our
astounding apartment landscape.
Many investors are using the new
year as a trigger to take a deep
breath to contemplate their internal
risk/return models. Clearly it’s not a
one-dimensional challenge to deter-
mine an appropriate investment
strategy when recent growth and
success have been so dramatic in
the multifamily arena. Consider the
following summary from 2014 per-
taining to our multifamily market:
• On pace to close over $2 billion
in transactions;
• An average price per unit of
$179,546 for third-quarter 2014;
• A trailing 12-month rent growth
of over 10 percent;
• Almost 20,000 units currently
under construction, with an addi-
tional 20,000 units planned;
• Double the number of apart-
ment permits from previous year to
date;
• Extremely high absorption of
more than 2,500 units for the last
two quarters;
• Return of high loan-to-value and
interest-only purchase money debt;
• Consistent ranking from experts
of Denver metro being in the top
five best markets to invest; and
• Solid job creation, quality of life
and quality of weather patterns
(especially compared with the East
and West coastlines).
So this begs the question, are
there a few trends that are notable
as we turn the corner of a new
year? Let’s explore two interesting
topics.
Have there been any shifts in where
buyers, developers and equity sources
desire to buy? In the first few years
after the Global Financial Crisis
of 2008, investors, developers and
equity alike flocked toward the core
markets of Denver, namely down-
town and Cherry Creek. In unstable
markets, the smart
money tends to
seek the best loca-
tions and most sta-
ble rent environ-
ments. Frequently
repeated buzz
words included
“urban core,” “mass
transit hubs,”
“upscale shopping”
and “pedestrian-
friendly urban
experience.” The
upscale renter pool
was displaced and
discouraged with
the traditional own-your-own-home
model and flocked to the best rent-
als in the coolest locations.
This resulting pool of new renters
propelled savvy apartment own-
ers to enjoy a breakthrough into
the holy grail of rents: the magical
and elusive $2-plus-per-foot rent
barrier. The resulting jump in rents
also allowed lenders to justify back-
ing seasoned developers to start
a plethora of new construction.
Another factor that helped spur
Denver’s apartment development
was the city’s severe lack of condo/
townhome development. Fear of
lawsuits due to Colorado’s construc-
tion defect law severely curtailed
developers from building any hous-
ing that would include a homeown-
er’s association. This lack of entry-
level housing to purchase, primarily
condo development, did constrain
the choices available for the typical
renter.
Apartment developers and inves-
tors started to shift toward the
less exotic and exciting suburban
markets in late 2013 into 2014. Par-
tially caused by construction starts
swamping the core markets, some
developers feared a bubble of over-
building. Additionally, rents started
to escalate in the fringe markets
and the dated properties started
to look interesting for “value-add”
investments. This trickle-down
effect of rent growth in the subur-
ban markets is very real: The new
“A” property gets so expensive for
the average renter that they move
to the less popular markets. Yet,
if an owner can make improve-
ments to a dated property, he or
she frequently can drive rents up.
New construction lags in these less
frothy submarkets, so rents go up
faster than expected.
An example of this is the recent
survey of over 100 cities across the
U.S., conducted by Apartment List,
which concluded that Aurora was
No. 1 nationwide in rent growth as
a percentage, from October 2013 to
October 2014.
What’s changing in the value-add
arena? Prices continue to increase
for value-add transactions. Investor
equity abounds and rents continue
to go up, especially in corridors that
are lagging in new construction.
The industry definition of value-
add offerings is also expanding to
include units constructed prior to
2000 (compared with a few years
ago, when it was typically pre-1985
year of completion). Properties built
prior to 2000 that have produced
a history of sustained cash flow
with few capital improvements (i.e.,
limited renovations to clubhouse,
kitchens, outside façade, etc.) are
hot candidates to be called value-
add. Many of these existing own-
ers have held the investment for
several years and they don’t desire
either to do the work or furnish the
capital to implement a new vision
for the property. A new buyer can
invest the funds to modify the look
to the exterior and interior of the
units, improve the resident base,
raise rents, improve management
and recast expenses, and the result-
ing higher cash flow supplies the
new owner with a solid return.
One fact is clear as we sail into
the new landscape of 2015, new
and old investors are excited to be
in Denver. With terrific job growth
and in-migration of renters to the
metro area, absorption of vacant
units continues to astound even
the tried-and-true pessimists in our
industry. Steady growth in values of
all ages and locations of apartment
properties in the entire Denver
metro apartment market will con-
tinue as long as rent growth is sus-
tained. An analogy that speaks to
this is “as the water rises all ships
go up.”s
Market Driver
TomWanberg
Senior vice
president,
Multi Housing
Investment Group,
Transwestern
Gallup House Apartments, sold by Transwestern, is a value-add property in Littleton.
national attention for its city attrac-
tions. In February, Golf Magazine
named The Broadmoor resort and
hotel the top golf resort in North
America. The website Trip Advisor
recently ranked Garden of the Gods
the top park in the country, ahead
of Central Park, New York, and Mil-
lennial Park, Chicago. Trip Advisor
also ranked Cheyenne Mountain
Zoo as the fifth-best zoo in the
country. Tourism remains a critical
driver of the Colorado Springs econ-
omy and the state of Colorado has
recognized the Springs’ potential
and provided support for continued
development.
The state recently backed Colo-
rado Springs’ City for Champions
by awarding $120.5 million in state
funds for a downtown sports sta-
dium, U.S. Olympic Museum, a new
sports medicine and performance
center, and U.S. Air Force Academy
visitor’s center. The Olympic Muse-
um has international implications
– increasing tourism from around
the world. These four projects have
the potential to reinforce an already
strong Colorado Springs tourism
industry, similar to the impact
that Coors Field had in revitalizing
downtown Denver.
All of these factors have led to
an ideal environment for a record-
setting year in terms of apartment
sales. At the end of 2014, total sales
volume for Colorado Springs explod-
ed to $484.4 million. To put this
number in perspective, 2013 saw a
total sales volume of $171.337 mil-
lion – making 2014 nearly $315 mil-
lion above the previous eight-year
average. This is all the more impres-
sive when considering 2013 saw
the largest apartment transaction
in Colorado Springs history in both
total price and price per unit in the
sale of the Alexan at Briargate.
Since December 2013, ARA has
seen three record-setting transac-
tions in addition to the Alexan at
Briargate. At the time of sale, Spring
Canyon sold for the highest price
per unit for any 1990s construc-
tion in the Springs’ history. Copper
Chase achieved the second-highest
price per unit for any 1960s con-
struction. With these new standards
recently set, the Colorado Springs
apartment market looks to have
truly arrived and projects very well
for an equally promising year in
2015.s