MULTIFAMILY UPDATE – FIRST HALF of 2016
By Miles King, CCIM
National MF Market:
Across the country investors are still looking for MF investments, but pricing and the lack of inventory seem to be the cause of fewer transactions compared to the same period last year. And according to the Yardi Matrix US, MF rents are expected to increase from 4% to 5% in 2016. Demand for campus housing investments has also remained strong in 2016. The National Real Estate Investor magazine reported rents for student housing across the country now average $683 per bedroom which is up 3.2% from last year.
There continues to be strong demand and abundant capital in the MF market, and parcels for new construction become harder to find, especially in the primary markets. More investors have turned to the secondary and tertiary market cities. Perhaps Denver and Boulder/Longmont are examples. . Many have also pursued the “Value Add” approach to investing. The “value add” approach lowers the gap between the new construction and older property prices.
In early 2016 absorption seemed to be to be keeping pace with this new supply of apartments. But Marcus and Milichap’s , MF research indicates several metropolitan areas may now be experiencing the results of overbuilding. It’s expected that the unusually high number of new units across the country will lead to an oversupply of class A apartments in downtown locations. We should probably expect to experience an increase in vacancy rates and a decrease in rent growth rates in the months ahead. Some developers and builders believe there is more opportunity in the upscale suburbs.
A disparity between rising rents and stable incomes remains an ongoing factor for renters, so sustainability also comes into question. Rent growth is more likely to be in the range of 4% in 2016 compared to 6 % last year. As a consequence, vacancy rates and rent concessions are expected to increase. If mortgage payments become cheaper than rent a concern on the minds of many is that higher rents will increase the desirability of home ownership over renting.
Regional and Denver MF Market:
Cycle Apartments, a new 450 unit apartment community by McWhinney, is under construction in Fort Collins alongside the new Foothills Mall. Jill Jamison-Nichols with the Colorado Real Estate Journal reported that the Holland Partner Group purchased the Stonebridge at Twin Peaks apartments at 2424 9th Ave. in Longmont for $34 million for an average of $197,674 for the 172 unit complex. The apartments were constructed in 1998.
Northern Colorado’s vacancy rate increased for the 5th quarter in a row to 5.48% according to Apartment Insight’s Cary Bruteig. He also noted that rents in the area have been decreasing for the last two quarters with a current rate of $1,156 per unit, or $1.32 per sq. ft. At the same time, rent growth has slowed from a high of 12% two years ago to 2% per year recently. Current absorption is not keeping up with the new supply of apartments
Mark Daniel VP with Real/Massive in Austen said that Denver finished 2015 with a yearly rent growth rate of 5.6%. According to Cary Bruteig, owner of Apartment Insights, 7,900 units were absorbed by the seven-county area in 2015, and the vacancy rate at the end of 2015 was 4.87% . Others who follow the Denver Metro market have pointed out that there are about 23,000 units currently under construction, and that around 9,000 of these new units are expected to be finished and on the market in 2016. We’ll see how those numbers play out and effect rent growth and vacancy rates. It has also become apparent that a very large percentage of these new units are high end class-A apartments. As a result, several developers and investors believe there are more opportunities in class B and C properties in some upper end suburban areas.
The good news is that job growth in Denver has remained strong with a creation of 48,100 jobs during 2015 according to the US Bureau of Labor Statistics. The Bureau also predicts a total of 45,000 new jobs in the Denver Statistical Area for 2016.
Many observers in the MF field feel that the Denver and the regional MF markets have probably peaked. Perhaps Sam Zell also believed that to be the case, because he sold 23,262 units in his Equity Residential MF portfolio for $5.4 billion early this year. Perhaps now is a good time to consider monetizing some of the gains that have been acquired over the last 6 years.
Boulder MF Market:
The sale of 6655 Lookout Rd. for $22,080,000 and The Lofts on campus at 1143 and 155 13th St. for $11,330,000 were two of Boulder’s largest MF sales during the 1st half of 2016. As of June 30th there were 13 reported Boulder MF Sales, representing a decrease of over 30% from 2015. The un-weighted average metrics for the 1st half of 2016 are as follows:
*Gross Rent Multiplier – 17.9, Estimated Cap Rate – 4.2%, Price per Sq.Ft. -$395, Price per Unit- $411, 552, Price per BR- $177,144, Rent per BR per Month- $860. The average sales price was 102% of the list price.
Southern Land Co., the owners of a 6 acre parcel on the SE corner of Pearl and 30th St. known as Reve, is expected to begin construction by year end on a mixed use property featuring 224 residential units with a range of market rents, 110,00 sq. ft. of office space, and 24,500 sq. ft. of retail.
Frasier Meadows, in partnership with Boulder Housing Authority, will be developing the Mount Calvary Lutheran Church site of 5 acres into an unknown number of affordable senior housing apartments.
Brickstone Partners is expecting to add an additional 96 beds to their recently purchased Cavalier Apartments near CU at 2898 and 2900 E. Aurora.
A unique new North Boulder development known as the Wonderland Creek Townhomes is nearing completion and will feature two and three bedroom units with 2 ½ baths.
MF mortgage interest rates continue to remain attractive for investors. Interest rates are around 4.2% for a 10 year fixed period, with a 30 year amortization, and lower for shorter periods of fixed interest rate. However, underwriting may soon be more limiting with lower LTV and LTC ratios, probably closer to the 65% to 75% range. And many lenders are becoming more cautious on MF construction loans.
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 the 11 geographic sub areas of Boulder or other nearby cities. No cost Market Evaluations of your MF investment are also available to owners considering selling or exchanging.
*Our office tracks all of the past MF sales and current active listings based upon 6 different financial and property metrics. Each listing and sales transaction is then grouped with the other properties in similar locations.