CREJ

Page 4 — Multifamily Properties Quarterly — February 2022 www.crej.com Market Update CIRCLE WEST ARCHITECTS 44 Cook Street Suite 100 Denver, Colorado 80206 Peter Koliopoulos AIA NCARB President + Founder TELEPHONE 720.319.7031 CIRCLEWEST.NET Live Beautifully. NATIONAL REACH, LOCAL RESULTS. 303-657-9700 BrinkmannConstructors.com E ntering 2021, the multifam- ily market had momentum and had proved its resiliency throughout the initial phases of the COVID-19 pandemic. Even so, at the time, it would have been hard to predict just how strong of a year 2021 would be and how many records would be broken along the way. n 2021 was one for the record books. During the third quarter of 2021, 268,331 multifamily units were absorbed across the United States, marking the largest quar- terly absorption figure in history. Rents also continued to rise; across the country effective rents grew 5.9% in the third quarter – the high- est quarterly increase on record. Metro Denver’s story is strong, with the market experiencing an extraordinary year. Throughout the course of 2021, the metro Denver area absorbed 13,182 apartment units, the highest 12-month total ever recorded. Per unit net effec- tive rents reached an all-time high of $1,743 as of the fourth quarter, a staggering 19.3% year-over-year increase over the pandemic low of $1,461. Even with effective rents ris- ing to never-before-seen levels, the cost of homeownership remains out of reach for many residents, driving them to rent. In December, the aver- age home price in metro Denver reached $626,573, up 14.5% from a year earlier. Applying a 3.5% inter- est rate, the monthly mortgage pay- ment on a home in Denver remains more than $500 above average effective rents. n Aggressive capital intensifies transaction volume and pricing to lev- els not previously seen. Nationally, trailing 12-month sales volume as of the third quarter totaled $241.9 bil- lion, a record high. Over the same period, Denver saw $7.8 billion in multifamily transactions. Cap rates continued to compress, fall- ing 21 basis points year over year to an average of 4.67% nationally. In comparison, metro Denver’s cap rates compressed 36 basis points over the same period, ending the third quarter at 3.91%, nearly 80 basis points lower than the national average. These sharply decreas- ing cap rates took pricing higher than ever before. Nationally, the 12-month average price per unit eclipsed $220,000 in the third quar- ter, and Denver saw per unit pricing reach nearly $327,000 in the same time frame, a 31.1% increase year over year. Throughout 2021, not only did investors pay record prices to acquire multifamily assets, but aggressive terms also became the norm. Seven-figure, nonrefundable earnest money deposits, shortened due diligence time frames and cash offers are now standard for nearly all institutional multifamily trans- actions in the metro area, and in similar markets across the country. n Transactions and cap rates will be robust. The abundance of 1031 exchange buyers seeking to invest in multifamily assets, coupled with the amount of dry powder raised by traditional multifamily investors and foreign capital groups, will con- tinue to keep pricing high and cap rates low. The preference to invest in nontraditional gateway markets, like Denver, has continued to grow and will keep metro area transactions highly competitive and put down- ward pressure on cap rates. It is easy to understand why Denver is in high demand for multifamily real estate investment; Denver’s total returns throughout the first three quarters of 2021 equaled 18.72%, well above the national average of 12.25%. In fact, Denver’s total return has out- performed the national average each year since 2009. n Fundamentals remain strong, though some challenges could impact operating performance and investor demand. The omicron COVID-19 variant’s arrival in the U.S. at the end of 2021 has impacted the labor market, delaying back-to-the-office plans and temporarily removing employees from the labor pool given quarantine requirements. Inflation impacts also have mate- rialized, with annual inflation in the U.S. totaling 6.8% for the 12 months ending November 2021, the highest 12-month increase in nearly 40 years. Cost increases and labor shortages continue to be felt throughout the industry and will impact new multifamily develop- ment from both a budgetary and timeline perspective. Interest rates also have been increasing with the 10-year Treasury rate finishing out 2021 at 1.52% and increasing to 1.78% as of Jan. 10. Additionally, banks across the U.S. are predicting as many as four Fed interest rate After record-breaking 2021, market on solid ground Courtney Crowder Managing director, multifamily capital markets, Newmark Please see Crowder, Page 30 Multifamily sale price and cap rate trends for Denver and the U.S.