CREJ

Page 28 — Multifamily Properties Quarterly — May 2022 www.crej.com Higher labor and construction costs also have contributed to the upward pressure on pricing as new sup- ply has entered the market, forcing owners of older inventory to make renovations at elevated costs. In addition to the built-in rent hikes, owners are transferring these costs to renters to continue to achieve favorable returns on their invest- ment. Of course, new residents aren’t the only ones vying for a piece of the Colorado Springs apartment pie. Investors and developers from across the state and country are flocking to Olympic City USA to compete for multifamily gold. Award-winning, international apartment developer Greystar has nine communities in Colorado Springs with at least two more in the works. Watermark Residential, a wholly owned affiliate of Thompson Thrift and one of the nation’s leading mul- tifamily developers, has begun build- ing Upland Flats, a 300-unit multi- family property. Colorado developer Goodwin Knight has an array of built, under construction and upcoming com- munities ranging from multifamily apartment complexes to built-for- rent cottages, including five com- pleted projects, five upcoming com- munities and five projects under construction. With so many developers in the market, competition has been fierce, with properties pulling in multiple rival bids, pushing sales prices to record highs. In the fourth quarter of last year, multifamily valuations increased 19% year over year. For the year, prices increased 16% for Class A, and 16.5% for Class B and C. Per door, the market saw an aver- age increase of 9% year over year. Meanwhile, cap rates compressed from 5.7% to 5.1%. This year, we’ve seen further cap rate compression into the mid-4% range. n Stronger foundation. While a rap- idly growing population and increas- ing values are of particular interest to investors and developers, the city’s economic foundation is even more critical to the asset class’s long-term growth and profitability prospects. While the pandemic took its toll, Colorado Springs wasted no time springing back into health with one of the fastest recoveries in the state. Its rapid recovery is in large part due to the city’s strong economic foun- dation of booming future-focused industries with high-paying jobs, such as aerospace and defense, space command, health care and medtech, and information technology and cybersecurity. More than 250 aerospace compa- nies have a presence in Colorado Springs, including California-based Aerospace Corp., which will launch a new $100 million, 90,000-square-foot research complex at Peak Innovation Park, adding 200 technical jobs over the next five years. Aerospace and defense accelera- tor Catalyst Campus is expanding its start-up portfolio of tenants in a 12-acre business park on the eastern edge of downtown Colorado Springs. One of its newest tenants is defense contracting company One Dev. One Dev plans to strategically acquire defense companies and relocate them to Colorado Springs. Blustaq, another Catalyst Campus alum, is hiring more than 585 people over the next eight years. Northrop Grumman plans to hire 250 employees by the end of 2022. Amazon recently opened a 3.5 mil- lion-sf fulfillment center with plans to hire 2,200 employees. In June 2021, Centura Health broke ground on its third hospital in Colorado Springs, St. Francis Hospital – Interquest, and plans to employ about 400 people. With so much development and growth taking place, it’s no surprise that the Milken Institute ranked Colorado Springs No. 9 in the U.S. in this year’s best-performing large cit- ies survey. Going forward, even with a year of interest rate hikes on the horizon, Colorado Springs’ landlord-friendly environment, advantageous market fundamentals and desirable attri- butes will keep demand for multi- family properties strong and poten- tially more aggressive. With pent-up demand and new investors compet- ing for assets, we predict valuations for apartment assets in the city will continue to increase through 2022. Savvy owners and investors will want to move fast to capitalize on the city’s growth and the apartment industry’s boom. s Pat Knowlton and Lee Wagner, both senior advisers with Capstone, contrib- uted to this article. jdimmen@capstone-companies.com Continued from Page 1 Market Update above 12% during 2021. The typi- cal gap between Class A and Class C effective rents in Denver is just under $600 per month and likely will hold close to that range. As such, exceptional Class A rent growth will continue to pull up other seg- ments’ rates alongside, contribut- ing to the forecast elevation in the average monthly rent payment in Denver to $1,881 per month in 2022, nearly 24% higher than the end-of- year 2020 figure and 6.6% above the December 2021 rate. n Denver’s multifamily investment market is one of the strongest in the country. Many foreign and institu- tional investors are eager to expand into the metro area. Improving fundamentals, ample institutional- grade stock and stable growth pros- pects are enticing these kinds of investors, as per-unit sales prices have steadily grown at least 7.5% annually every year since 2010. As a result, the fourth quarter reported the highest quarterly dollar volume on record, with nearly $4.5 billion transacting. All apartment tiers posted upticks in trading during this period. Institutional activity in the city also has raised the area’s vis- ibility among capital sources and played a role in compressing the average cap rate to just under 5%. First-year yields as low as 3% are not uncommon for top-tier assets in and near the core. While national and institutional investors have ramped up acquisitions in downtown Den- ver, a notable increase in trades also has been reported in the metro area’s eastern and southeastern sub- urbs. Growing areas like East Denver and Aurora have enticed investors, particularly for assets near light-rail stations. Additionally, the southeast, from Glendale to Lone Tree, has reported elevated trading in recent months. These areas and the core stand to benefit from a return to offices as demand for housing near the Denver Tech Center and the CBD should escalate further upon more workers resuming in-person opera- tions. s jason.hornik@marcusmillichap.com Hornick Continued from Page 4 ment units remains strong and the challenges to develop new apart- ment communities persist, I expect to see strong rent growth over the next 12 months. Rising home mort- gage rates pushing some would-be homebuyers back toward being renters for the foreseeable future may serve to further reinforce the demand for new apartment units. At this point in the market cycle, and with what has happened in the financial markets in the last six months, a much more difficult piece of the value equation to predict is cap rates. We have seen cap rates in the region compress down to the high 3% or low 4% range for the best Class A, institutional assets. Cap rates don’t appear to be rising at this point, likely due largely to the tre- mendous amount of capital chasing Class A apartment assets in attrac- tive markets like Northern Colorado, but we are watching them closely. While there is much uncertainty in the world and the financial markets, it appears very likely that the Class A apartment market in Northern Colorado will remain robust for the next 12 months, and likely beyond, as the rapidly rising costs and inter- est rates will hold supply in check to some degree over the next few years, and unless demand drops off a cliff, vacancy should remain quite low. I expect that rent growth will be quite strong. Again, the major wild card will be cap rates over the next few years. If rent growth remains strong and cap rates don’t rise significantly, we should continue to see increased apartment valuations in the foresee- able future. But if cap rates were to rise significantly, rent growth may be necessary simply to hold valua- tions relatively steady over the next few years. s jakeh@affinitycre.com Hallauer Continued from Page 6