CREJ - Multifamily Properties Quarterly - August 2023
While the multifamily market has cooled compared to the highs that were reported in 2021, Northern Colorado market fundamentals still remain relatively strong. This fundamental economic dance between demand and supply has allowed multifamily to continue to be one of the more desirable asset classes for investors and developers alike. That said, there are two different stories emerging simultaneously in Larimer County and Weld County during price discovery.
At the end of the 2023 second quarter, nationally (and locally) we saw rent growth continue to soften, but we also saw multifamily demand rise and stabilize vacancies. In the fourth quarter of 2021, annual rent growth reached its unsustainable peak of 12.8% in Larimer County, but it has since decelerated to 2.5%, according to CoStar’s July 2023 market analysis. This deceleration is a reset that is needed to return to the long-term market average of approximately 4.7% in Larimer County, according to NAI Affinity’s market survey conducted since 2012. The average asking rent in Larimer County is approximately $1,725 per month, which is nearly $50 per month more than the national average. A key driver of elevated rents and perpetual rent growth here is lack of supply compared to demand. In the trailing 12 months, 358 units were delivered with 467 units absorbed, according to CoStar. Weld County reached its record-breaking percentage rent growth in the first quarter of 2022 at 9.5% and, according to CoStar, has since decreased to 0.6% annual rent growth currently. The average asking rent in Weld County is $1,510 per month. In both counties, we attribute some of this decline in rent growth to the lack of movement that we are seeing among apartment tenants due to economic uncertainty, inflation-related cautiousness, and being priced out of the first time homebuyer market.
The current average vacancy rate across all multifamily product types in Larimer County is 5.5%. The Larimer County vacancy rate continues to remain below the national average vacancy rate of 6.7%. However, vacancy in the affordable segment continues to remain further compressed as economic uneasiness and increased inflation are causing low- to mid-income-earning individuals to look for more affordable options. New inventory in Larimer County is concentrated in Loveland and Johnstown and will expand inventory by 7.8%. While we are keeping an eye on how this could cause upward pressure on vacancy rates, we do not believe we will see a meaningful impact. That said, we are watching the vacancy rate of 15.9% in the Weld County market, according to CoStar, which includes properties in lease up. Weld County is experiencing a large construction pipeline that has significantly increased supply in the first half of this year, mostly in Erie, Greeley, and Firestone. While there continues to be a large construction pipeline in Weld County, inevitably some proposed developments being tracked in the pipeline will be delayed or not pursued. Coupled with housing market conditions and positive U.S. Census Bureau forecasts for Northern Colorado, we do not anticipate vacancy continuing to expand in the long-term.
In line with the national trend, investment activity in Larimer and Weld counties’ multifamily markets has slowed in the first half of 2023, as the market is currently in a phase of price discovery and 10-year Treasury volatility resulting in rising cap rates. This has made acquisitions more challenging for investors, particularly for institutional quality assets. We saw the sale of The Greens at Van de Water (252 units) in Loveland transact on June 8. This was a favorable property for the buyer, as they were able to assume the seller’s loan with an approximately 3.45% interest rate for three years, which compressed the cap rate to 4.81%. The total sale price for this transaction was $75.15 million. Other multifamily investment opportunities that have transacted in Larimer and Weld counties during the first half of this year have been primarily older and/or smaller properties. Many investors are expressing interest in these older properties as value-add investments with the potential for greater returns.
When recommending cap rates to clients during this period of volatility, we look at the timing of comparable sales and the 10-year Treasury. The 10-year Treasury is a key metric because cap rates generally correlate with the long-term average. For example, the Johnstown Plaza Apartments transacted on Sept. 22, 2022, for an approximate cap rate of 4.52%. The cap rate at the time of sale was approximately 120 to 150 basis points above what the 10-year Treasury was when this group likely
locked its interest rate an estimated 90 days prior to closing. Using our methodology above, we would arrive at an estimated cap rate of 5% to 5.3% for a buyer locking their loan on July 20, 2023, with the 10-year Treasury being 3.86%.
While the multifamily market is not immune to the economic headwinds that we are facing, it continues to be a desirable asset class to invest in as renter demand continues to remain strong in Northern Colorado and opportunities persist.
"NoCo Fundamentals Remain Relatively Strong", written by: Brecken Schaefer, Project Manager & Real Estate Analyst, and Lauren Larsen, Advisor, NAI Affinity
Source: CREJ - Multifamily Property Quarterly - August 2023, pg. 8