CREJ - Multifamily Properties Quarterly - August 2017
Investor demand is at an all-time high in the multifamily markets of Colorado Springs and Aurora, due to the strong growth over the past 18 months and predicted growth in the next 12 months. Buyers are riding a market wave, as continued aggressive rent growth is projected into 2018. Local, regional and numerous national buyers new to both markets continue to compete for assets, raising the bar to levels never seen before. Strong economic drivers in both markets continue to push rents, sales and construction; additionally, investors are capitalizing on value-add opportunities, renovating older properties and subsequently increasing rents. Aurora has an approximate population of 362,000, compared to an estimated 465,000 in Colorado Springs. There are about 32,000 existing units in Aurora with an additional 1,000 under construction. In contrast, Colorado Springs has 48,000 existing units and another 2,000 under construction. Colorado Springs had its best year for multifamily investment sales in 2016. Annual sales volume increased 14 percent over 2015, growing from $447.7 million to $510.4 million, and the average price per unit grew 12.3 percent. Economic growth in Colorado Springs is attributed to the vast number of aerospace, cybersecurity, IT and medical innovation companies that call the region home, as well as more than 30 Fortune 500 firms and five military installations. Meanwhile, with the developments of the Fitzsimons Innovation Campus, the $1.8 billion Denver International Airport build-out plan underway, and light-rail expansion spurring strong rental growth along Interstate 225, Aurora now has solid economic and transportation drivers that should bode well for years to come. While both markets are experiencing strong economic growth, Aurora is seeing higher ‘per pound’ pricing and slightly higher average rent levels. Aurora averaged $441 million in sales volume between 2015 and 2016. In direct correlation to robust sales numbers, both markets have experienced robust rent increases through the first quarter. Aurora saw a 12-month increase of 11.4 percent, while rent in Colorado Springs grew 10.3 percent for the same period. The year-over-year rent growth of 10.3 percent in Colorado Springs is ranked second-highest nationally behind Reno, Nevada, for secondary markets. Both markets should continue to see paced new construction – in comparison to central Denver and the 36 Corridor, for example – as rising costs versus current market rents are keeping deliveries moderated. Only select sections in both markets are viable for new construction. In addition, both markets continue to see single-family home prices climb, pushing upward pressure on rents. The median home price in metro Denver has risen 88 percent since 2011, creating high barriers to homeownership, particularly among millennials. This, coupled with high in-migration, has kept general vacancy low and demand for rentals high in submarkets like Aurora, where rental units are priced below a mortgage payment for an entry-level home. Further both markets are experiencing some of the lowest vacancy rates in the state, hovering in the 3 percent range. Value-add investment strategies have been the norm in both areas. There are countless examples of buyers purchasing older buildings and fully renovating them or adding significant upgrades. For example, in Colorado Springs, there have been dozens of Class C properties renovated over the past 36 months, resulting in dramatically increased rent levels and property values. Unlike stock in many other Front Range markets, value-add opportunities still are abundant throughout Aurora and Colorado Springs. In Aurora, over the past 12 months, 1980s built properties have averaged around $168,000 per unit, compared to 1960s era properties averaging just under $90,000 per unit. Comparatively, Colorado Springs’ older Class B and C categories have seen less fluctuation in price per unit and sales volume based on the decade of construction. In 2016, apartment buildings constructed in the 1960s and 1970s traded at around $80,000 per unit, while 1980s built construction traded at $108,000, on average. As of late, there have been several sales, and current for sale product, at well above $100,000 per unit for upgraded or well-located 1970s product in both markets, continuing to state the increasing strength of the markets. Firm economic growth and market fundamentals should continue to propel investment activity throughout Colorado Springs and Aurora in 2017 and 2018, with value-add opportunities remaining more prevalent in these markets than most other Front Range submarkets. Barring substantial interest rate movement, both multifamily markets should remain competitive, with increasing tenant and investor demand, creating a further decline in going-in cap rates. Further, Colorado Springs and Aurora continue to attract new out-of-market buyer pools, boding well for continued seller confidence throughout the rest of the year and into 2018.