NoCo Class A Apartment Market Looks Promising

NAI Affinity
May 4, 2023

CREJ - Multifamily Properties Quarterly - May 2023

The northern Colorado Class A, institutional quality/scale, apartment market continues to demonstrate resiliency amidst the macroeconomic uncertainty and turbulence in the capital market.  This likely due to a number of factors, but most importantly continued population and employment growth in the region and the continued, and growing challenges developers face while attempting to deliver new product to the market to meet the continued demand.  While it’s a bit hard to predict the future in such an uncertain time, if the population and employment growth continue in the region, while home prices continue to increase and mortgage rates remain over double what they were just over a year ago, I believe it’s extremely likely that the region will continue to experience strong demand for new Class A apartment communities. 

One dynamic that will likely create additional demand for new Class A apartments over the coming years is the decline in home builder activity in the region.  Given the challenges for homebuyers, particularly first-time homebuyers, affording to purchase new homes given the rapid rise in interest rates and prices in the market, I expect many of those would-be homebuyers will likely be renters of Class A apartments or build to rent communities (as those are developed) to be renters for the foreseeable future while thirty-year mortgage rates remain over 6.0%.  This may result in additional demand for larger units, including two-bedroom apartment units, three-bedroom apartment units and townhomes.

According to NAI Affinity’s bi-annual market survey/report which was just completed, stabilized communities in Larimer County experienced a year-over-year increase in average asking rents, per square foot, per month, of approximately 2.56% with that rate climbing from $1.89+/- to $1.93+/-.  Over that same period, chunk rents grew from $1,783 to $1,826 per month.  Occupancy decreased slightly during this period moving from 96.03% to 94.94% year-over-year.  It appears that some landlords favored pushing rents in this period vs. maintaining very high occupancies.  Just under 95% occupancy still indicates a very healthy market, particularly when factoring in the decline in home building activity in the region, as the overall rate that new housing is delivered in the region is likely to decline in the near term.  It also remains challenging to find an appropriately zoned site and to pencil new communities in Larimer County given the impact fees, water costs, land costs and construction costs, as well as the effect that the capital markets turbulence and the significantly higher interest rates are having on financing these projects.      

In the northern Weld County (Greeley, Evans & east Windsor) area, occupancies increased, moving up slightly from 95.30% to 95.78%, year-over-year.  Average asking rents, per square foot, per month, were up even more dramatically than in Larimer County during that period, increasing from $1.71+/- to $1.77+/- for a growth rate of 3.68%.  Chunk rents grew impressively during this period, increasing from $1,566 to $1,650 per month.

In terms of investment sales, the market is likely still in “pricing discovery” mode given that the last sale transaction was Trails at Timberline in Fort Collins which sold in October of 2022 for $110 million, at over $350,000 per unit and an approximate cap rate of 4.0%, according to CoStar.  That cap rate is up ever so slightly from the absolute cap rate low we saw in the market about 18 months ago of approximately 3.80%.  This is almost unbelievable given that over that same period the 10-year treasury yield increased approximately 250 basis points.  That seems to indicate the desirability of investing in Class A, institutional quality/scale, in the region remains high, although there appears to be a large gap in buyer and seller expectations on pricing at this point in the market.  I don’t expect to see many investment sales of these types of assets in the region for the remainder of the 2023, but the next few sales may help with the “pricing discovery”.  

Despite the continued uncertainty and turbulence in the capital markets, the Class A apartment market in northern Colorado appears to remain quite strong and resilient.  While 30-year mortgages remain over 6.0% (which should limit renters from moving into homeownership as quickly as they did over the past several years), I expect to see ongoing demand for new apartment units.  With all of the headwinds that make it difficult, expensive and tedious to ramp up the delivery of new units in the region, I anticipate that the market will remain strong, as long as demand remains robust.  The major wild cards over the next few years will be cap rates and the rate of household formation.  If rent growth remains decent to strong (as I believe is fairly likely), cap rates don’t rise significantly, and the rate of household formation doesn’t decline significantly, we should continue to see stable, or perhaps increased, apartment valuations in the foreseeable future.  However, if cap rates were to rise significantly, significant rent growth may be necessary to simply tread water on valuations and if the rate of household formations rapidly declined, while cap rates rose, that could result in a backslide on valuations in the region.  I expect that the next year will be telling in which direction these very important factors are headed.    

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"NoCo Class A Apartment Market Looks Promising", written by: Jake Hallauer, CCIM, President, NAI Affinity

Source: CREJ - Multifamily Property Quarterly - May 2023

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