CREJ

Page 10 — Multifamily Properties Quarterly — February 2022 www.crej.com Investment Market Heaquartered in CO 60 + Communities Featured Services: Lease-Up New Development Renovation Stabilized Over 10,000 Units | Apartment & Property Insurance | Flexible deductible options | Many carriers & affordable options Commercial Property Specialist Protect yours today. dthome@buckner.com 303.756.9909 Dustin Thome YOUR INSURANCE, YOUR TEAM. Insurance Benefits Surety Risk Management A bout one year ago, I wrote about the expected success of the Colorado Springs multifamily market head- ing into 2021. The results of 2020 were that of delight for many bullish investors focused on this growing Front Range market. As I write this today, much of the same sentiment remains. Only the sustained success of multifamily in Colorado Springs now offers a unique opportunity for those hold- ing substantial equity in their long- time-owned multifamily assets. Of course, time is of the essence. Cap rates in Colorado Springs have plummeted. In fourth-quar- ter 2020, the average cap rate on sales of multifamily properties built between 1899 and 1979 was 5.17%, per CoStar. If you’re reading this in 2022, things have changed. Third-quarter 2021 showed us the first-time average cap rates for this older vintage product dipped below 5%, and the fourth-quarter settled on 4.95%. Less than 10 years ago, cap rates hovered in the 7% range. These current cap rate numbers reflect the very little perceived risk in investing in Colorado Springs now. In the same period, and for the same older vintage product, the average sales price per unit dra- matically increased from around $125,000 per unit to $163,000 per unit (CoStar). We expect, but cau- tiously, this number to go up. This is great news for the belief in this city. Investors have a lot to like about the future of Colorado Springs and the potential for wealth gen- eration. But this article is meant to serve current own- ers. The intense interest and sub- sequent growth of this city is promis- ing but also pres- ents some future challenges for the longtime-owned family assets. Population growth is a real driver in Colo- rado. In the Springs, population has grown by over 100,000 people since 2010, per Census data. In 2010, the population of our state’s most extensive city was 622,263. In 2020, that number was 730,395. Not only is Colorado Springs the larg- est municipality in Colorado, but El Paso is the largest county in Colo- rado by population. It, like every- where else in this popular state, is expected to increase. With higher populations, higher demand for housing permeates. New multifamily construction is underway with about 4,800 units under construction in the first quar- ter, per CoStar. This is new competi- tion for workforce housing tenants and could dampen rent growth upside in C Class properties. As more new construction proper- ties are absorbed into the market, demand could loosen. The boom is now. Some of the biggest purchas- ers of multifamily in the last year were large groups of private equity from coastal cities. We also have seen massive institutional groups make huge investments in North- ern Colorado. It’s only a matter of time before we see that sort of institutional and slightly subinsti- tutional equity chase outside their strike zone for product in Colorado Springs. And then what happens in five to 10 years, when demand is further fulfilled? Over the next several years, the blending of Front Range markets looms. There will be new homes, new apartments and shorter commutes for many. This could mean demand for central- ized living may not be as desirable as it is right now in this current moment. Liquidity is obviously not an issue for multifamily in Colorado. What is an issue is that we are entering an inflationary environment with inev- itable interest rate hikes. The cost of debt increasing means the ability to stretch pricing decreases. Stagna- tion is possible. There still are great returns to be made on low cap rates in Colorado Springs. This will con- tinue, and money still will be active. But the ability to really stretch that pricing and get the ultimate max value for that asset only exists in a finite window of opportunity. In general, Colorado Springs has outperformed all expectations. It should be expected that the city will continue to outperform. The belief and the faith in the quality of living of Colorado Springs will solidify its desirability to inves- tors for years to come. But with any city experiencing rapid growth and demand for growth, there will be challenges along the way. Liv- ing in Colorado is a transformative experience for many, and we should expect to see our cities continue to transform. s kclarke@pinnaclerea.com Rare opportunities for Colorado Springs sellers Kenny Clarke Associate adviser, Pinnacle Real Estate Advisors It’s only a matter of time before we see that sort of institutional and slightly subinstitutional equity chase outside their strike zone for product in Colorado Springs.

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