Colorado Real Estate Journal - December 16, 2015

Apartment building boom will take time to absorb, says report

The Denver metro will experience an unprecedented number of rental units entering the market in the fourth quarter, according to a recent analysis by Marcus & Millichap.

Of the 6,000 units scheduled for delivery, 1,250 of them will be in the Downtown/Highland/ Lincoln Park submarkets.

The glut of rental units will take some time to absorb but the influx of new residents will inject even more life into an already vibrant area, according to the Marcus & Millichap report.

The stock of rental housing will swell by 11,000 units this year, a 4 percent jump in total inventory from a year ago.

Older, value-add properties are especially sought after by investors.

One recent example is the $3 million sale of a 22-unit apartment building at 1200 Colorado Blvd.

The 13,300-square-foot building was built in 1950, according to public records.

Greg Price and JD Lemon of the Denver office of Marcus & Millichap represented the buyer. The buyer had paid $535,000 for the property in 1995, according to records.

Lemon found the buyer, a private investor from Colorado.

“Twelve Hundred Colorado Blvd. is a stable 22-unit asset with a very healthy mix of one- and two-bedroom units,” Lemon said.

“The upside of the location with everything that is taking place at the old University of Colorado Health Sciences Center at Eighth Avenue and Colorado Boulevard was the ultimate draw for the buyer along with the upside potential in rents through unit renovation,” Lemon said.

Investors see continuously increasing rents and overall positive momentum in the local economy and are taking the opportunity to buy well-located older assets to renovate and reposition to command even higher rents, according to Marcus & Millichap.

Cap rates have generally been falling across all sectors, though initial yields in the B and C sectors have compressed significantly, narrowing the spread between those sectors and Class A product.

Class A complexes trade with cap rates in the 5 to low-6 percent range while well-located Class B and C assets hover in the low-6 percent range.

All submarkets are doing well, though older product in suburban submarkets such as Broomfield and North Aurora have registered the largest percentage increases in per-unit prices in the past year.

One important factor is a slowing, but still growing, employment market.

The workforce will expand by 27,000 workers, or 2 percent, in 2015, easing from the 52,500 employees added in 2014.

Unemployment is hovering just over 3 percent and well below the national rate.

However, the apartment market will be impacted by the increase in supply.

The vacancy rate will rise by 110 basis points this year to 4.8 percent due mainly to the large number of units being delivered in the fourth quarter, according to Marcus & Millichap.

However, the impact will be short-lived.

The vacancy will fall again next year, as completions slow somewhat over the first part of the year.

The average effective rent in the metro area will surge 10.9 percent in 2015 to $1,347 per month, surpassing even the sizable increase posted in 2014, the commercial real estate firm noted.

However, the gap between the cost of renting versus owning continues to increase, with renting still far more affordable.

The supply of new rentals will outpace growth in demand in 2015, especially with a glut of completions in the fourth quarter. This will cause vacancy to rise 110 basis points over third quarter and above the 2014 level to 4.8 percent.

With vacancy remaining tight, the pace of rent growth will remain high, jumping 10.9 percent to $1,347 per month in 2015. This follows a year-over-year increase of 10.7 percent in the previous year.

Investor activity remains strong as demonstrated by an uptick up in transaction velocity of about 13 percent in the past year.

Average cap rates range from the low-5 percent span for properties built since 2010 up to the mid-6 percent area for 1970's and earlier-vintage product.

Buyers paid an average of $186,530 per unit during the past 12 months, an advance of 16.2 percent year over year. The dollar volume surged 41 percent year over year, to roughly $3.4 billion as a result of a larger number of higher value transactions occurring.

Marcus & Millichap remains bullish about the Denver area’s apartment market.

“Solid job growth and continually rising rents means investors remain keen on the Denver market, while many owners realize they have a lot of equity and are cashing out,” according to Marcus & Millichap.

“This will keep transaction velocity elevated.”