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Multifamily Investment Property Update

By Miles King CCIM, CRS, GRI

1/26/2011

Both an improved lending environment and rising investor confidence contributed to a significant increase during 2010 in multifamily (MF) property sales. There were a total of 31 MF transactions in Boulder, a 35% increase from 2009. At that rate, and with current inventory of 24 MF listings, Boulder has a much improved 9.2 month inventory. However, this is still a long way from the peak sales rate of 65 sales in 2005. In part, this reduced inventory has been the result of 43 withdrawn or expired unsold listings throughout the year.

The sale of the 83-unit Hub Apartments at 1853 26th Street for $14 million dollars was the largest sale of the year. The complex had a total of 89,143 square feet and sold for $168,675 per unit, or $157 per square foot.

Improving lending conditions, along with decreasing vacancy rates, economic optimism, and attractive interest rates, all contributed to a increase in transactions throughout the past year. The availability of attractive financing also helped greatly. Ten-year fixed rates and 30-year amortization terms, with interest rates in the 5.00% to 5.75% were not uncommon. High tenant occupancy rates, very little new construction, and steady demand also improved the multifamily market conditions throughout the year.

During the 1st quarter of 2010, the vacancy rate in the University Hill area was as low as 1.5%, reports Gordon Von Stroh, author and professor at the University of Denver. Overall, the City of Boulder had a 4.9% vacancy rate. By midyear, the Metro Denver MF market recovery was reported to be well on its way. The 2nd half of 2010 continued to see improving conditions. According to a report by the Colorado Division of Housing, the 3rd quarter vacancy rate for the combined Boulder-Broomfield market was 3.5% and the Fort Collins vacancy rate declined to 2.8%. Statewide, the Colorado vacancy rate dropped to 5.5% from 7.4% the prior year.

In his Colorado Real Estate Journal article of January 4, 2011, Jeffrey Hawks - a principal with Apartment Realty Advisors in Denver - predicts that these conditions, coupled with slightly lower cap rates, will allow more owners to sell their properties during 2011. This will lead to a great improvement from 2008 and 2009. Hawks also expects the Denver Metro area’s job market to continue to lead the nation back to a more normal job growth. Additionally, he states that 2011 might see a 25-year high in multifamily occupancy rates.

One would expect to see modest rent increases throughout 2011 as a result of these increasing occupancy rates, pent up demand due to increasing household creation, and fewer home buyers. At the national level, rents are expected to climb in the 2.5% and higher range during 2011.

One survey indicates that investors at the national level expect existing cap rates will continue through most of 2011. However, there is always the concern that if interest rates increase, cap rates will most likely follow, thereby lowering values and sales prices. Any rent increases would increase Net Operating Income (NOI) and help offset high borrowing costs. As of the 3rd week in January, the 10-year T Bill yields increased to 3.5%, and consequently MF interest rates have risen as well.

Some of the upcoming Boulder multifamily projects include Lou Delacava’s Residences at Twenty Ninth Street, with 238 units under construction at 1825 30th Street, and Boulder Housing Partners’ proposed 59-unit senior housing community at 4990 Moorhead Ave. Down the road a few years, the $65 million transit-oriented development project at 3100 Pearl Street, known as Junction Place, will have an estimated 320 apartments in four buildings on the five acre site.