CREJ - Multifamily Properties Quarterly - August 2017
Overall, the Colorado market has been strong through the first half of 2017. The state has absorbed over 5,500 units and average effective rent has increased about 5.1 percent. The number of units absorbed this year is higher than in the first half of 2016 and 2015, by about 2,000 units and 1,200 units, respectively. Overall occupancy, as of the end of June, was at 93 percent, a slight increase from the 92 percent average in the previous six months. For a closer look at the market conditions, it’s helpful to look at the movement in key indicators such as average effective rent growth, occupancy and absorption in each asset class. Class A properties have performed well when compared to the previous two years, but there are signs that the level of new construction is starting to drag down effective rent growth. In the first half of 2017, we’ve seen almost 1,700 Class A units absorbed, an increase from the 1,500 in the first half of 2016 and the 1,470 in the first half of 2015. However, there is some softness in effective rent growth. While still positive, average effective rent grew by only 3.8 percent in the first two quarters, a noticeable drop from the 6.3 percent increase in 2016 and the 6.6 percent increase in 2015. This is signaling that the top of the market is feeling the influx of new construction units entering the market at an accelerated pace. The silver lining is that despite the slowdown in rent growth, occupancy is trending in the right direction. As of the end of June, average occupancy was 82.8 percent. This is not an ideal number, to be sure, but it does mark an improvement from the 79.6 percent rate of the previous period. Overall for the top tier, average effective rents are up, average occupancy is up and absorption is up. Class B properties have seen a similar dynamic play out regarding these three indicators. Absorption is up compared to the first half of 2016 and 2015. A little over 900 units have been absorbed in this asset class in 2017, whereas 2016 saw about 700 units absorbed and 2015 had a negative value of nearly 375 units. The positive trajectory also is present for occupancy. With an average occupancy this year of 92.6 percent, the previous six month’s average of 92.2 percent was ever so slightly edged out. However, just as with Class A, there has been some erosion in effective rent growth. The new supply at the top if the market means that some of the properties near the threshold of Class A and Class B have been bumped into the latter. This has resulted in increased competition in this price tier, although the conditions are hardly bleak. In the first half of 2017, the average effective rent growth was a robust 5.7 percent. The previous two years showed immense price growth, however, and 2017 did not keep pace. In 2016, the average effective rent growth was 6.2 percent, and in 2015 the figure was 8 percent. Despite the decline in rent gains, there certainly isn’t reason for concern in the near term. Class C also is on solid ground. After absorbing 1,200 units on the first half of 2015 and about 700 in 2016, 2017 saw a huge increase to slightly over 2,700 units. This represents over half of the total number of units absorbed in the state through June. Additionally, average effective rent growth improved from the 3.7 percent rate of 2016 by a full 2 percent despite falling short of the 2015 6.5 percent growth. Occupancy also rose 1.5 percent from 92.8 to 94.3 percent, a substantial improvement from 2015 and 2016, which were both under 1 percent through the first six months of the year. Class D has not kept pace with the great start to the year in the other classes, but even here, the numbers aren’t terrible. Absorption decreased by 50 percent from 2016 – but, at a little over 300 units, it is still better than the 2015 number of about 240 units. Additionally, average effective rent has increased 2.7 percent, which is higher than 2016 and 2015, when both were under 2 percent. Occupancy has increased by 0.5 percent to 95.5 percent. Absorption in this class can be shakier than the rest of the market due to units lost to closure or demolition. The lack of occupancy loss and the improvement in effective rent growth show that the Class D tier is in good shape. The driver for much of the movement in these indicators is new construction, in addition to employment and population trends. There has been a clear shift in the new construction pipeline over the past few years, and its impact on effective rent growth is clear. We were tracking about 28,500 new construction units in the planning phase in 2015. That number slid to just over 12,000 in 2016 and was at 4,500 through June. Projects under construction or entering the early phase of lease-up totaled about 21,000 units in 2015, about 28,000 units in 2016 and just over 30,000 units for 2017. The number of units in full lease-up with construction completed has held steady at about 4,900 for all three years. This all reflects a clear movement from planning in 2015, to construction and beginning of delivery in 2016 and 2017. Looking ahead into 2018, the last remaining units of the initial planning boom in 2015 will be entering the market and will put additional pressure on the top asset tier that already is showing some signs of rent growth slowdown. Multifamily overall in Colorado had superior effective rent growth figures in 2015 compared to both 2016 and 2017. This held true across all four asset classes. However, the first half of 2017 saw the highest absorption overall and across all classes, except D, for this three-year timeframe. Colorado is a growing market, and short of a premature increase in planned new construction, the outlook for the rest of 2017 and the first half of 2018 is bright.