CREJ

Page 6 — Multifamily Properties Quarterly — November 2021 www.crej.com Market Update T he Northern Colorado mar- ket for Class A, institutional size and quality, apartments continues to get stronger as unit deliveries have dropped off significantly over the last 12-18 months and as demand for apart- ment units continues to be very high – and appears to be accelerat- ing. The strength and resiliency the market has shown following the global COVID-19 pandemic shock is nearly beyond belief, and that has resulted in rapid rental rate increases that the market hasn’t experienced for about a decade and occupancies that are nearly as high as they were during the recovery from the Great Recession in 2010, when this apart- ment development cycle began in the region. The strength of the market is reflected in NAI Affinity’s biannual survey, which was just completed. Stabilized communities in Larimer County experienced a year-over-year increase in average asking rents per square foot per month of approxi- mately 12.59%, with that rate climb- ing to $1.81 from $1.61. Occupancy also improved dramatically, increas- ing to 96.21% from 93.56% year over year. In the northernWeld County (Greeley, Evans and east Windsor) area, occupancies also improved significantly, increasing from 94.59% to 96.32% year over year, and aver- age asking rents per square foot per month were up even more dramati- cally than Larimer County, increasing from $1.41 to $1.67 year over year for a growth rate of 18.6%. Concessions remain extremely low (one month’s free rent maxi- mum and only in select instances) or nonexistent in the market. Delinquen- cies have normal- ized to more of a long-term average after the initial eco- nomic shutdown due to COVID-19 and the following several months when delinquen- cies increased. In several instances, landlords have even begun charging rent premiums for 12-month leases on certain units within their commu- nities, as they are seeking 15-month lease terms, or longer, to attempt to smooth the seasonality in the market created by student renters. This strength in the market and the in-migration into Northern Colorado from other states, regions and even from the Denver metro area have led to significant ongoing demand for quality institutional apartment community development sites, and rightly so, as there are less than 1,000 units within Class A, institu- tional communities currently under construction in the entire region. In comparison, nearly 3,000 units were under construction and in lease-up in the time period between 12 and 36 months ago. I don’t anticipate unit deliveries to grow significantly from what is under construction currently over the next 12 months given that the timeline to entitle, construct and deliver units continues to lengthen. According to CoStar, approximately 1,800 units have been absorbed in large-scale apartment communities in the region over the past 12 months, as com- pared with the 1,400-1,500 units we were seeing absorbed on an annual basis for two to three years prior. Demand appears to be accelerat- ing while unit deliveries in the next 12 months will be as low as they’ve been for at least five or six years, which should result in additional rapid rental growth in the foresee- able future, and likely until a sig- nificant number of additional units are delivered and/or demand drops off significantly, neither of which appears likely in the near future. In 18-36 months out, I expect to see unit deliveries increase fairly significantly, but that will be necessary to meet the demand in the market unless that demand declines significantly, which seems unlikely at this point. The strong market fundamentals, coupled with cap rate compression and strong investment demand for Class A institutional assets in the region, has created an excellent opportunity for apartment owners to consider selling. Cap rates have com- pressed by approximately 100 basis points on the best assets over the last five years, with market cap rates in the low 4% range for the best Class A institutional assets. Each subsequent sale of a Class A institutional asset sets a new record on a per unit sale price basis given the growing rents and compressed cap rates, with the current high-water mark being in the low $300,000s per unit range on a suburban community. The are many persistent challenges in the Northern Colorado region that limit the delivery of new units, including: sourcing quality develop- ment sites in municipalities/districts with cost-feasible impact fees and favorable raw water situations; con- tinually rising development impact fees and raw water dedication costs; longer entitlement and construction timelines due to lack of staffing in planning departments; and supply chain/material procurement chal- lenges and concerns from developers about overall cost feasibility of proj- ects in certain municipalities and/ or water districts. Some municipali- ties also have raised their cash-in- lieu of raw water fees and/or other impact fees, which exacerbates the challenges related to delivering new attainable or affordable housing to the market and, in some cases, also hampers delivery of new market-rate units, which also negatively impacts overall affordability of housing in those areas. Given the lack of near-term unit deliveries on the horizon, the acceler- ating demand for apartments in the region and the very tight market in terms of unit availability, I expect the area will continue to be a very attrac- tive region for apartment developers for several years to come. Their main challenge will be finding suitable, reasonably developable sites in areas where the municipal fee structure and raw water dedication require- ments allow for profitable new devel- opment of apartment communities, but the growing rents should serve to make some projects viable, which likely would not have otherwise been viable with rents where they were 12 months ago. s jakeh@affinitycre.com Biannual survey results reflect market acceleration Jake Hallauer, CCIM President, NAI Affinity