CREJ - Multifamily Properties Quarterly - April 2015
Year-to-date multifamily investments have been an exciting asset class to watch. They are steady and reliable income and expense operations that pro- - vide a high value-added opportunity with limited risk. If you are interested in exploring a multifamily investment, here is a look at the current market on a national and local level. In an article summarizing the national 2014 multifamily market in the January issue of Commercial Investment Real Estate magazine, Kenneth P. Riggs Jr., CCIM, CRE, MAI, FRICS, quoted several statistics from various real estate data research companies that are worth noting. The nation’s apartment vacancy rate ended fourth-quarter 2014 at 4.3 percent, and the annual effective rent increased 3.9 percent to an average monthly apartment rental rate of $1,117, according to Reis. Reports from Real Capital Analytics indicate the price per apartment increased 21.5 percent to $128,259. And ERCC reported the initial cap rate required by investors across the nation declined to 5 percent. The same group also predicted that the effective rent growth rate would be 3.1 percent in 2015 and 2.6 percent in 2016. The Denver metro market reportedly is one of the top multifamily markets in the country outside of the coastal cities. There was a record $3.25 billion in apartment sales in the Denver area in 2014, according to Cary Bruteig, principal of Apartment Appraisers & Consultants. Bruteig’s statistics indicate the sales volume of apartment buildings of 50-plus units was up 78 percent from 2013. The overall apartment vacancy rate increased slightly from 3.7 percent to 4.1 percent, but remained the lowest fourth-quarter vacancy rate in 11 years, he said. There are nearly 100 apartment projects with over 19,000 units under construction in Denver, said Bill James, MAI, CCIM. Approximately 10,000 units were completed in 2014. There is much debate and some concern about overbuilding. New Class A apartments are now receiving as much as $2.20 per square foot, per month, in rent, and sales prices of over $400 per sf. I have heard the expression that in order to determine a city’s economic condition and vitality, count the number of construction cranes in the area. Boulder’s landscape is littered with cranes, and experienced more construction activity in 2014 than in years past. Downtown Boulder, the University of Colorado’s main and east campus locations, North and South 28th Street, northwest Boulder and south Boulder all have had visible cranes over the past year. The Daily Camera’s Oct. 12 informative review of Boulder’s growth and development focused on 12 major construction projects in process. In that article, 12 major developments were highlighted, and many of these are new apartment projects. From the multifamily real estate perspective, the landscape has changed considerably in the last few years. Up until the development of Two Nine North at 1955 30th St., new market-rate apartments of any size had been conspicuously absent for decades. With the exception of an occasional new dorm for CU students, most new multifamily housing units were sold as individual condos or townhomes. In addition, Colorado’s growth in jobs and population, and the trend toward an urban lifestyle have created a strong demand for apartment living. Throughout 2014, the multifamily resale market was exceptionally strong. Due to continued low interest rates, high occupancy rates, strong rates of annual rent growth and in-migration of millennials, Boulder multifamily investments are in great demand. The supply of residential income properties for sale cannot keep pace with demand. At one point during fourth-quarter 2014, there were only three multifamily properties for sale in Boulder. This imbalance of supply and demand creates an exceptionally strong sellers’ market, which increases prices and compresses cap rates. An example of this is the last three sales of the 161-unit apartment complex at 2850-2890 Kalmia Ave. in north Boulder. In February 2009, the property, previously known as The Boulders, sold for $20.9 million. In May 2011, it sold for $33.5 million. Last October it sold again, this time for a price of $44.2 million. Previous owners made some improvements, but this is a 111 percent price increase in 5½ years. From Jan. 1, 2014, through Dec. 31, 2014, there were 36 multifamily sales in Boulder. Several of these were “offmarket sales” or placed under contract before they became public knowledge. Prices ranged from $452,500 for a duplex to $93.5 million for the 238 apartments at Two Nine North. The unweighted average metrics for these 36 sales are shown in the chart.