NoCo Class A Multifamily: Less Supply Under Construction

NAI Affinity
February 16, 2024

CREJ - Multifamily Properties Quarterly - February 2024

A number of factors have led to fewer units under construction in several areas of Northern Colorado than we’ve seen in a number of years. These include macroeconomic factors (federal funds rate, U.S. Treasury yields, etc.) that have led to rapidly rising interest rates, which reached the highest level in several decades in 2023. In addition to this very challenging capital markets environment, there are challenges specific to Northern Colorado that have regulated the supply of new apartment units, including: lengthier entitlement timelines than in the past and higher impact fees/raw water costs in most municipalities; construction costs, which are no longer rapidly rising like they did for many years, but which are still extremely high relative to just a few years ago; and land pricing, which has held strong.

Currently, there are only 1,725 Class A institutional market-rate apartment units under construction in Larimer County, according to CoStar. Fewer than 600 of those units are in Fort Collins, just under 800 units are under construction in the Loveland/Johnstown area and just over 350 units in one community in Windsor, just east of Interstate 25. Given that several of these projects are very early in the construction phase, I don’t expect more than 1,000 units, if that many, to be delivered in these communities in 2024. In 2023, there were zero units delivered in Fort Collins in these types of communities. This coupled with much less new for-sale home construction in the region over the past year likely will result in tight residential supply in Larimer County for the foreseeable future.

While there was a fairly large wave of supply that was delivered in northern Weld County in 2023, within Class A institutional market-rate apartment communities (just under 1,600 units according to CoStar), there are many fewer units currently under construction in similar communities than there have been in the recent past in this market (approximately 900). Again, this is a relatively small number of units for an area (northern Weld County) with a population approximately 225,000 throughout numerous municipalities.

To put this into perspective, according to the most recent U.S. Census Bureau data available, it appears that Larimer County’s population has been growing at approximately 1% annually over the past few years, which would mean approximately 3,700 new residents this year. Weld County’s population has been growing at approximately 3.4% per year over the past several years, which would indicate approximately 7,650 new residents in 2024. Using those figures, that would result in 11,350 new residents in 2024. With the persons per household being approximately 2.35 in Larimer County and 2.86 in Weld County, that would indicate the region would need about 4,250 new homes to support that growth.

With the 1,900 units under construction, and with my assumption that the growth in the number of renter households in the coming years will likely significantly outweigh the growth in the number of homeowner households due to the interest rate environment and cost of housing, this would seem to indicate that the supply has about been meeting the demand the last few years. The major challenge I foresee is that while the state demographer continues to project strong growth in the region and an outsized portion of the in-migration to the state coming to Northern Colorado, we are in a situation where there has been a major supply disruption. With the rapid rise in the fed funds rate, and the resulting interest rate shock that rapid rise caused, many projects that developers had been entitling were delayed or shelved for the foreseeable future in the last 18 months.

Couple that with ongoing, significant challenges in underwriting new development deals due to overall costs and financing terms, which is delaying many deals, and we are in a situation where I expect fewer starts over the next 12 to 24 months than we’ve seen in years – unless rates come down significantly. If the region doesn’t experience at least as many starts over the coming years as we have in the past few years, population growth continues like it has for a number of years and interest rates don’t decline significantly (making it both difficult to start new housing units and for homebuyers to afford mortgage payments), I expect there may be a coming shortage of apartment units in the region. The developers who are able to weather this storm and bring projects out of the ground over the next several years will likely be rewarded, assuming the Northern Colorado region continues to experience population growth and household formations like it has in the past.

AdobeStock 282126592 - NoCo Class A Multifamily: Less Supply Under Construction - NAI Affinity
Source: Adobe Stock

"NoCo Class A Multifamily: Less Supply Under Construction", written by: Jake Hallauer, CCIM, President, NAI Affinity

Source: CREJ - Multifamily Properties Quarterly - February 2024, pg. 10

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