CREJ - Multifamily Properties Quarterly - August 2017
The Class A market-rate apartment market in Northern Colorado remains quite strong, despite a number of projects in lease-up and a higher number of units under construction and in the pipeline than over the past several years. While there are a significant number of additional projects in the pipeline, it is important to note that I don’t believe all of the proposed projects will be built, and I expect the timing of many of the deliveries to be pushed further into the future than some developers may be anticipating. There are a variety of reasons for this, including, but not limited to: •Entitlement and permitting timelines taking longer than in the past, •Development impact fees and raw water costs increasing in some municipalities, •Geographical and political barriers to entry, •Equity requirements from many lenders being approximately twice what they have been in this cycle, •Some lenders pulling back on apartment construction lending due to high portfolio concentrations, •Potential for interest rate increases, •Construction costs (particularly labor) continuing to escalate quickly, and •Construction delays due to labor shortages. With a watchful eye on apartment trends, interest rates, construction costs and feasibility of projects in the region, we estimate that of the nearly 4,000 units proposed (within institutional quality and scale communities, not including communities under construction), only approximately one-third or less of those units will break ground in the coming year. Presently, there are approximately 1,300 units under construction (again, within institutional quality and scale communities). I still view Northern Colorado as a favorable environment for apartment development, and I continue to see positive unit absorption, strong occupancies and rents, as well as a lack of significant rent concessions in the market, although nominal concessions are being offered at some communities. • Apartment demand. I believe demand for apartments will remain strong for the foreseeable future given that Northern Colorado continues to see solid population and employment growth, as well as rapidly rising home values, which keeps many would-be homebuyers in the rental market. Fort Collins/ Wellington/Timnath’s median home price is projected to reach $395,000, while Loveland/Berthoud’s median home price is projected to reach $338,000, and Greeley/Evan’s median home price is projected to reach $265,000 in 2017, according to The Group Inc. Additional factors driving apartment demand include living preferences of the millennial and baby-boomer generations and the relative nonexistence of condo development, although there are a handful of condo projects under development now. Many people within the millennial and baby-boomer generations are drawn to renting downtown, urban or suburban apartments, which offer close proximity to dining, entertainment, culture and night life, while also featuring the community and shared spaces within the apartment buildings. Even if millennials can afford to move to a house in a more suburban neighborhood, many will choose to live in apartments instead, according to Forbes Magazine. This is likely due to their preference for flexibility, mobility, and little or no home maintenance. Fifty percent of millennials are renters. Almost half of all adults and 73 percent of millennials, report they are “very” or “somewhat likely” to move in the next five years, according to the Urban Land Institute. Apartment living allows individuals to move with more ease, rather than being tied to one place. The number of millennials choosing to rent rather than own results in a decline in homeownership, leaving a record-low percentage of American homeowners under the age of 35 since 1982, according to U.S. News & World Report. When comparing year-over-year statistics for institutional quality and scale communities, which we survey biannually, the occupancy rate for the properties declined slightly from 97.67 to 96.69 percent. The average monthly rental rate, per unit, decreased to approximately $1,405 from a previous rate of $1,425. This equates to an average monthly rental rate decrease of 1.4 percent year over year. On a per-square-foot-per-month basis, the average asking rental rate decreased from $1.53 to $1.50, a decrease of 2.03 percent over this same time period. Of most importance, the average gross rent per unit per month, at the current occupancy and asking rental rates, decreased from $1,389 to $1,357; a decrease of 2.31 percent year over year. These figures do not include concessions, which are minimal in the present environment, nor do they include items that would produce other income, such as garage rent (averaging $88 per one-car-detached garage, per month); pet fees, deposits and rent; amenity fees; administration fees; application fees; and vending and laundry income. It is important to note that I attribute the slight decline in occupancy and effective rents, year over year, to 474 units being in lease-up at the same time in the Loveland area. I have seen this have a similar impact in the past and the softness appears to have some seasonality, as the lease up impacts the market more in the fall than in the spring. Following a dip in occupancy and rents in the past five years, I have seen a strong rebound in occupancy and rental rates immediately after. While condo development may begin to ramp up given the recent construction defect reform legislation, which was passed in the state, and the favorable ruling by the Colorado Supreme Court in the Vallagio case, I don’t expect this to have a significant impact on the apartment market for several years, if not much longer, due to ongoing high insurance costs and a lack of developers, insurers, contractors and architects/ engineers willing to take the risk on condo developments as well as the high cost to develop this product. Given the strong tenant demand for apartments, driven by ongoing population and employment growth and the supply constraints mentioned, I expect to see deliveries remain relatively staggered and the apartment market continue to expand for at least the next two to three years, barring any unforeseen black swan event.