By Miles King, CCIM, B. Scot Smith Broker, Owner/Founder Colorado Group, Inc., Realtor & Wade Arnold Broker/Owner, Colorado Group, Inc., Realtor
Boulder MF Market:
During the first Quarter of 2020 we noted that the big unknown facing all of us was the effect Covid-19 would have on our lives, our economy, and on MF Real Estate. We referred to it as the proverbial elephant in the room. For the past seven months we have been totally preoccupied tracking its effects on our health, our lifestyles, our education, our employment, and its impacts on our entire economy. We all know what happened, but many uncertainties still lie ahead. The following as they relate to the Multifamily real estate market are several such unknowns and concerns:
The CU students are back on campus, but the huge spike in new Corona cases has forced online learning and strict anti- socializing regulations for 18 to 22 year old’s. What would happen if positive cases increased further? Would CU close the campus again? In the meantime, due to the high unemployment rate, what could happen to rent collections, the enforceability of our leases, vacancy rates, our mortgage payments, evictions, cash flows, internal rates of return, and in many cases, our financial livelihoods? Will Single Family rentals outpace MF due to Covid-19 for reasons of social distancing? How will the decrease in Foreign investments in the US effect MF? And what about the threat of Rent Control? And the list goes on.
In early June the Colorado Apartment Association reported that property management company’s received full or partial rents from only 89% of their tenants. But most months since have seen such collected rents at 90% or slightly above.
Colliers International stated Denver’s year over year vacancy rates for the first quarter increased slightly, and the rate of rent growth had decreased to 2.5%. National average apartment rents actually registered a slight decline. In the second quarter The Colorado Apartment Association reported a vacancy rate of 6% for the state.
Rent control is a hot topic. California and Oregon are the two newest states to pass rent control. But many urban cities across the country are considering ways to limit rent increases. It seems reasonable to conclude that setting any limits on the ability of owners to obtain market rents will begin the process of rent control. And it’s a slippery slope. Look what happened in Boulder with the required licensing of all residential rentals. Originally the purpose was simply to protect Tenants’ health and safety. But over the years the threat of losing one’s rental license has been used to accomplish many other unrelated goals on the City’s agenda. In the long run, both the supply of housing and the tenants, will benefit more if positive incentives, such as zoning changes, increased occupancy, faster entitlement processes, and the easing of regulations are employed. Why not use the “Carrot” instead of the “Stick”.
Covid-19 caused double digit unemployment, and severe recession. And the FED has effectively added some $3.5 trillion into our economic system. The 10 year T- Bill is .75%.
So MF mortgages for 5 units and up with 30 year amortizations are slightly under 3% for 5 year fixed and slightly over 3% for 10 year fixed. This is certainly an enticement for MF investors. However, the best rates are in the 50% to 60% Loan to Value ranges with annual debt coverage ratios of 1.40% or higher. And for added protection, some lenders are adding 10% vacancy rates into the Net Operating Income equation, and requiring that up to 12 months of prepaid principal and interest payments be placed in an escrow account at closing.
The good news is that investor demand for Boulder MF properties remains strong. And in comparing the first three quarters of this year with the previous year; we see that average estimated Cap Rate has decreased to 3.8%. That shouldn’t be surprising with lower mortgage interest rates, and continued investor demand. * But, in 2019 average Cap Rates were closer to e 4.5%. Prices per apartment and per bedroom have continued to increase. But the most noticeable difference between this year and last has been the lower volume of Boulder MF sales transactions! Only 15 sales in the first three quarters. Last year there were 38 sales in 2019. This year we are only expecting a total in the low 20s. That’s an approximate decrease of 35%. Perhaps this is due to Covid-19 caution and other concerns. Because of the huge additions to our money supply this year one might also expect to see inflation again. If that is the case hard assets like real estate should be good investments.
Please contact Miles King, Scot Smith, Wade Arnold, or one of our other Colorado Group Brokers for additional detailed information including Cap Rates in each of 11 geographic sub areas of Boulder. No cost Market Evaluations of your MF investment are also be available to owners considering selling or exchanging.
* Our office tracks all the past MF sales as well as the current active listings based upon 6 different financial and property metrics. Each listing and sales transaction is grouped with other properties in similar designated locations for additional, and more relevant detail.