CREJ - Multifamily Properties Quarterly - January 2015
Record breaking. That’s how 2014 will be remembered in the Northern Colorado multifamily industry. All three cities, Fort Collins, Greeley and Loveland, posted record rents, vacancies and sales numbers. As a tertiary market, the numbers for Northern Colorado don’t have the overall impact or attention that Denver or other major metropolitan markets attract. However, on a scaled-down view, comparisons of data show Northern Colorado as one of the strongest markets, operationally, in the state, if not nation. Steady and strong. That was the message delivered at the Northern Colorado Business Report’s 2014 Economic Forecast at the beginning of last year. Through the first three quarters of 2014, you might say this was an understatement. Leading the way, Weld County’s foothold in the energy realm exploded and attracted job seekers to major oil and gas companies, while opportunistic entrepreneurs started up companies looking to support the major energy activities in the region. Not far behind energy, Weld County’s agriculture industry had facets that enjoyed a prosperous 2014. With a foundation in a more diversified economic base, Larimer County enjoyed growth in 2014 through innovation fostered by incubators like Innosphere (formerly Rocky Mountain Innosphere). The county also saw growth in health care, professional services and manufacturing. All areas in Northern Colorado experienced a spike in the construction industry, with multifamily being a large contributor. Apartment construction in the region over the past few years is unlike anything seen since the 1990s and early 2000s. Construction did not miss any of the local municipalities: Fort Collins, Greeley and Loveland. Developers made the leap to develop in areas considered more speculative, trying to capitalize on lower land values and aggressive growth in the region. The unemployment rate in Weld County was at 3.9 percent in November while Larimer County came in at 3.2 percent. Compare this with the state’s unemployment rate, which decreased two-tenths of a percent to 4.1 percent. With oil prices plummeting in fourth-quarter 2014, many are cautiously watching and waiting to see if prices stay low and what effect that may have on the overall economy, not only in Weld County, but also across the state of Colorado. Apartment rents appreciated more than most anticipated in 2014, with upward pressure as a result of increasing home prices and lack of affordable choices, driven, seemingly, from the scarcity of condominiums and townhomes due to concerns around the construction defect law, combined with increased land and construction costs. In 2014, Larimer County saw average rents increase nearly 10 percent compared with 2013, while Weld County saw increases around 12 percent. Average rents in Fort Collins hovered around $1,150 per month in the fourth quarter and Weld County rents hovered around $830 per month. Vacancy rates in Larimer and Weld counties have remained below 5 percent since 2011. Some areas of the region spent most of this time below 3 percent. Fort Collins averaged an annual vacancy rate of 3.5 percent for stabilized properties in 2014, with most of the vacancy due to a few larger remodel efforts. Loveland is experiencing the lowest vacancies in the region at 2.5 percent, while Greeley has hovered around an average of 3 percent for the past year. Vacancies and rents like these are sure to attract developers who wait for all of the market indicators to align. In the last couple of years, the indicators were all positive – climbing rents, extremely low vacancies and difficult barriers to competitive entry. This attracted not only regional developers, but also national players in the market-rate and student-housing development worlds. Major projects from developers like Spanos Corp., McWhinney, Crowne Partners, Scott Ehrlich and Milestone have added units, or are planning to add units, to all markets in Northern Colorado. The sales volume for 2014 will be the high-water mark for Northern Colorado going forward. At the time this article was written, sales volume for 2014 was set to crest over $260 million. The previous high, set in 2008 when AIMCO sold five Northern Colorado properties as part of a portfolio sale, was less than half of 2014’s total. The per unit average also increased a staggering 167 percent from $54,670 in 2008 to $145,882 in 2014. All of this happened on a smaller number of units transferring ownership – 1,777 units in 2014 compared with 2,003 units in 2008. Midway through 2014, the sales volume was sitting at $47.7 million, mainly due to a lack of opportunities in the marketplace. The majority of the $200 million trading hands in the second half of the year came through two portfolio sales. One comprised McWhinney’s sale of three properties (two in Loveland and one in Westminster) and the other was made up of three student-housing properties sold in Fort Collins by Walnut & Main. Overall, 2014 was a fantastic year for the multifamily market in Northern Colorado. Owners and managers were able to fill their properties with eager tenants. Rents continued their climb while vacancies continued to be minimal. Sellers were able to maximize the values in their properties through extremely low cap rates and never before seen demand. With rental rate increases far exceeding inflation, 2015’s activity will be watched cautiously with the anticipation of pricing and vacancy leveling off. With inflation meekly increasing somewhere between 1.6 percent and 2 percent, combined with very high housing prices, I expect to see continued excellent performance on the operational side of the multifamily market along with stabilized rents and moderate vacancy.