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2008 Boulder Multifamily Real Estate Notes
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by Miles King, CCIM, Broker Associate, Realtor
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12/19/2008 |
One year ago at our Colorado Group, Inc. office Advance (Retreat) we talked about the unusually large number of multifamily sales transactions for all of 2006 and the 1st 3 quarters of 2007.
But, at the same time, we felt that the 4th quarter of 2007 market activity was definitely slowing down.
That was certainly the case, and it has continued to slow throughout 2008.
Halfway through November of this year our Boulder multifamily sales volume was down 37% from the previous year. And our inventory has increased by 32%.
The following are some notes that characterize our current local multifamily market and perhaps many other markets as well:
A. With the tighter credit markets, higher debt coverage ratios, and other stricter mortgage lending requirements, there are fewer investment dollars available.
B. Investors are expecting a reasonable cash on cash return, before taxes, with the current rents and actual operating expenses.
C. Many investors are standing on the sidelines with a "wait and see" attitude.
D. There has also been a growing recognition by investors that they were not getting adequate returns to compensate for the risk and management involved in owning investment real estate.
E. Consequently, my guess is that the cap rates have increased 75 to 100 basis points across all our Boulder areas. What used to be a 4% cap is now 5% and 5% is now 6%. However, rental rates are also increasing and will help offset the lower values caused by higher cap rates.
F. Most prospective buyers understand these factors, and are expecting higher returns, but sellers often are not aware of these changing metrics; or aren't willing to sell at the resulting values. Therefore, a significant disconnect exists in the market place.
G. An Example of this is a 40-unit apartment building owner who was frustrated at the high appraisal he received as a result of the recent death of his partner. Based upon the comparable sales 12 to 18 months ago, the appraiser used a 5% cap in helping to determine value. Most likely, that was accurate, but today's market requires using a ratio of closer to 6% with that sized property in its specific location.
H. Most successfully closed transactions in 2008 occurred between motivated sellers, and with buyers who were capable of using 35% to 45% or more in down payments. Smaller properties between 1 and 4 units are easier to finance and require significantly less down payment.
Some Positives in the multifamily market:
1. The MF market may currently have the strongest fundamentals of all the investment real estate product types.
2. Vacancy Rates are decreasing with fewer homebuyers and little new construction. Everyone has to live somewhere. Boulder's overall vacancy rate is probably under 4%.
3. Local rents are increasing.
4. Mortgage rates are improving. At this writing the 10 yr T-Bill is about 2.7%. Hopefully, 10 year, fixed rate commercial mortgages will gravitate to the 6.0% range.
In the Latest Colorado RE Journal, Jeff Hawks, with Apartment Realty Advisors in Denver, said that the Denver metro MF market will be a good focus for investors for 2009 because of the following:
1. The vacancy rate is under 6%
2. There is positive rent growth
3. High Costs of New Construction exist throughout the area.
4. There are barriers to entry
5. Cap rates have already increased.
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