CREJ - Multifamily Properties Quarterly - January 2015
Residential multifamily properties have become a favorite among investors, making the real estate category one of the most popular in the region. - In 2014, Boulder County continued to see unprecedented activity through new construction as well as existing sales in the multifamily market. So what will the market look like this year? I expect to see construction slow down, vacancy rates increase and rents level off. Let’s discuss what factors are driving the market locally. Demographics. A variety of factors contributed to the multifamily Boulder boom. One of them hinges on investors banking on widespread news about shifting views around home ownership. The MacArthur Foundation, for example, found that 57 percent of all Americans believe that renting a home is more appealing than owning. While the generational attitudes toward home ownership may very well be feeding the demand for apartments in Boulder, there are a few more local economic factors to consider. Boulder County has continually been named one of the top 10 desirable regions in the country to build a business, according to Businessweek. Couple that with the strong local economy and a high barrier to entry for purchasing a home in the county, and the output has been a strong demand for apartments, making them a safe investment. Increasingly, housing inventories are tightening and we are seeing a dramatic increase of families migrating to Colorado. For example, between 2000 and 2013, Colorado's population increased by more than 22 percent, a pace that beat the nation's rate of growth by 12 percent. Economics. Real Estate Investment Services reported that the Denver metro multifamily market reached a low vacancy rate of 3.6 percent in 2014, and the Apartment Association of Metro Denver reports that Broomfield and Boulder are at 3.3 percent vacancy. Look at both measurements compared with other investment classes, such as office or industrial property vacancies, which are currently two to three times higher, ranging from 6 percent to 9 percent. Even as the vacancy rate remains low, rents have continued to rise. According to the Apartment Association of Metro Denver, the average rent rose 7.4 percent during 2014. The rental price for third-quarter 2014 in Boulder and Broomfield was approximately $1.50 per square foot, with many new projects marketing rents exceeding $2 per sf. Nationally, we see a similar trend. Axiometrics reports that the national annual effective rent growth in November 2014 reached 4.7 percent, the strongest result of the year, as well as since the crippling recession of 2008. So what does this mean for your Boulder County multiunit property in 2015? There continues to be strong interest from investors seeking multiunit income properties. This is due in part to an environment providing a low risk (with unprecedented low vacancy and increasing rents) and also due to speculation that the demographic change in attitudes away from home ownership will continue to increase demand for rentals. Currently, there is a gap between supply and demand with demand for housing outpacing supply. With the number of new units coming on line in the next few years, as well as the rents for some of these new projects passing $2 per sf, one has to wonder if demand for rentals will taper as the cost to own a home becomes as affordable or, in some instances, more affordable than renting. Consider this: A one bedroom 600-sf apartment in Boulder can cost as much as $1,200 per month, whereas that same monthly payment is enough for someone to be able to afford to purchase a $250,000 to $275,000 home or condo. This year, I believe we will see an increase in multifamily sale transactions as the conditions are prime to consider selling and the demand from investors continues. Vacancies likely will increase as new projects providing amenities like clubhouses, workout facilities and pools compete with older properties absent of such amenities. Rents will level off, as renters will have more options to consider. All in all, 2015 will be another exciting year for the multifamily market.