Colorado Real Estate Journal - January 21, 2015
Last year was one for the record books when it came to apartment sales in the Denver area. Cary Bruteig, principal of Apartment Appraisers & Consultants, reported there was a record $3.25 billion in multifamily building sales in the Denver area in 2014. Bruteig, in his Apartment Insights quarterly report, which tracks sales of apartment communities with at least 50 units, showed that the sales volume was about 78 percent higher than the $1.8 billion in sales in 2013. However, the volume of 20,273 units sold last year as only 41.5 percent higher than the 14,326 units sold in 2013. When just communities with 100 or more units are included, which has been the metric that Bruteig has been using for more than two decades, the total came to just under $3.1 billion in sales. “The next highest was $2.5 billion in 2012,” for the sale of communities with at least 100 units, Bruteig said. Not only did more units sell, but also they fetched substantially higher prices, Bruteig reported. The average unit's price was $157,051, 25.2 percent more than the average unit sales price of $125,403 in 2013. On a per-square-foot basis, sales averaged $181.29 in 2014, 21 percent higher than $140.14 per sf in 2013. Monthly rents, meanwhile, booked a “stunning” 12 percent year-over-year gain, according to Bruteig’s report. The rent increases came at a time when the inflation rate hovered around 2 percent. Almost certainly, that provided the biggest the largest increase ever in terms of “real” dollars and not just nominal dollars. Apartment experts said that Bruteig’s report is right on target. Jeff Hawks, a principal of the Denver office of ARA, said it is important to put last year’s apartment market into historical perspective. “I would say it is highly likely that we hit sales last year of 50 percent higher than our previous biggest year,” Hawks said. “I think the $3.2 billion in sales is bigger than what the entire market sold during the decade of the 1990s,” Hawks said. Investors'appetite for Denver-area apartments drove up prices to never-beforeseen levels, he said. “For the first time, we saw multiple transactions above $200,000 per unit and some cases of more than $300,000 per unit,” Hawks said. “Even the 1970s valueadd properties were going for more than $100,000 per unit,” he added. Few analysts predicted such a gangbuster year. “I didn’t see it coming,” Hawks said. “At the beginning of 2014, I predicted we would experience sales of just north of $2 billion, after we had dropped slightly under $2 billion in 2013,” Hawks said. So what happened? One important factor was that interest rates stayed unexpectedly low last year. Almost every economist and observer had predicted rates would rise last year as the economy improved. “If not for such low interest rates, investors would have offered less money for apartment communities and the owners would not have sold,” since they were enjoying such great returns and cash flow from their properties, Hawks said. Jordan Robbins, a director of Denver’s HFF office, said another reason that the local multifamily market was on fire last year is because investors increasingly wanted to plant their flag in the metro area. “I think it is a testament to Denver being on everybody’s radar screen,” said Robbins, whose team made the largest sale in the fourth quarter, the $99.88 million sale to Eaton Vance of the Sonoma Resort at Saddle Rock. “Institutional investors, high net-worth individuals and family offices, and value-add investors, were among the new buyers in Denver,” Robbins said. One factor driving investor interest was the “staggering” increase in rental rates. Indeed, during an apartment tour of developments last fall, put together by the Colorado Real Estate Journal and Bruteig, every apartment community boasted higher rates and higher occupancies than projected. That was true whether it was a garden-style apartment community in Broomfield, along the southeast corridor, or a high-rise tower in downtown Denver. “Denver has really become a major market,” Robbins said. There is no sign that the market will be slowing, he said. “I think there is a lot of meat on the bones,” Robbins aid. “I think the overall trend will be for rents to increase over the next five years or so,” he added. Bruteig, in his report, did offer a short-term “cautionary flag.” The overall apartment vacancy rate increased to 4.13 percent at the end of the fourth quarter. That was a 21 basis point increase from the third quarter. “However, it is the lowest fourth-quarter vacancy in the 11 years of our survey,” Bruteig noted. Still, with 9,136 units being completed in 2014 and 13,500 scheduled to be completed this year, the vacancy rate will rise. Indeed, with more than 14,000 units in the lease-up stage, the vacancy rate could double to more than 8 percent this quarter, Bruteig warned. Still, no one can argue that 2014 was the best multifamily market ever in the metro area, said David Potarf, a senior vice president in CBRE’s Denver office. “It is crazy,” Potarf said. “The big question now is, ?Can we do it again?'” The short answer, Potarf said, is he does not know. Pressed to look into his crystal ball, he said there are a couple of factors in play. “Theoretically, we can’t eclipse last year’s sales record, because so much has been sold in the last three years that there just isn’t that much to sell,” Potarf said. On the other hand, a number of recently completed developments in downtown Denver and transit-oriented developments in the suburbs will sell this year for record prices, he said. “I kind of think that last year will be the high watermark for quite some time, but who knows? If you had asked me in 2013 if we would have seen the kind of market we saw in 2014, I wouldn’t have predicted it.” One bullish mid- and long-term factor for the Denver-area apartment market is that the metro area has become a magnet for millennials, those born between the early 1980s and early 2000s. “I think Denver’s apartment market is going to have a pretty long run with the millennials,” Potarf said. “Young professionals, and other demographics, want to live here because of our quality of life and our strong job growth,” Potarf said. “I don’t see that changing. If anything, Denver will become more attractive for millennials,” he said. He agreed that more investors are discovering Denver. “Last year, we saw a lot of new investors coming to Denver,” Potarf said. “A lot of them were from California, but we also saw a lot of new investors coming from the Midwest and the East Coast,” he said. Indeed, the biggest challenge this year is a shortage of willing sellers, Hawks said. “The year has just started and we already are getting calls from investors who want to buy in Denver,” Hawks said. “We have to tell them that we just don’t have that much to sell them right now,” Hawks said. “I think that is true for our competitors, too. There is a real shortage of properties to sell,” Hawks said. While this year’s potential sales volume is probably a better question for brokers, Bruteig said it certainly is possible that 2015 could set a record for sales. “I see no reason why it couldn’t,” he noted. “Denver underwrites very well and with strong rental growth and low vacancy rates, there will be a substantial interest from investors this year,” Bruteig said. “Really motivated buyers willing to pay top dollar could convince apartment owners to part with their properties.”