Northern Colorado Class A Apartment Market Holding Steady

NAI Affinity
November 17, 2023

CREJ - Multifamily Properties Quarterly - November 2023

Amidst rapidly deteriorating capital markets conditions and uncertainty in the economy and global geopolitical landscape, the Northern Colorado Class A, institutional quality/scale, apartment market remains relatively strong, overall. As of late, given the historically rapid increase in the federal funds effective rate, and thereby the rapid increase in interest rates, coupled with less attractive terms developers and investors are seeing from lenders (to the extent the lenders remain active in this environment) and ongoing cost challenges in the region, it appears that the apartment pipeline has largely been significantly delayed, or has vanished, for the time being. It is extremely tough in this current environment for many developers to reach their threshold for unleveraged return on cost to start a new project, so many projects have been delayed while developers watch the market.

While the market has seen slowing rent growth over the past year relative to many recent years, so far, there appears to be continued population and employment growth in the region. That growth along with the ever-increasing challenges developers face while attempting to deliver new product to the market is likely to result in much less new supply delivered to the market over the coming years. Assuming the population and employment growth continue near the pace they have in the region for the few years before the COVID-19 pandemic and in late 2021 and 2022 after the brunt of the housing market effects had worn off, while home prices continue to increase (like they have so far) and mortgage rates remain nearly triple what they were just eighteen months ago (or possibly increase from here), I believe it’s extremely likely that the region will continue to experience strong demand for new Class A apartment communities.

These communities will be the alternative to homeownership for many who simply can’t afford the monthly mortgage payment with 30-year mortgage rates for conventional mortgages near 8.0%. With the newest challenge of supplying that demand while the economics of new development are strained, I expect to see a fraction of the deliveries we’ve seen over the past several years a couple years in the future. If that demand is not supplied, and 30-year mortgage rates stay anywhere near 8.0% while home values continue to increase, I expect to see another high rent growth period like we experienced coming out of the Great Recession and for much of the 2010s until very recently.

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 3.70% with that rate climbing from $1.88+/- to $1.95+/-. Over that same period, asking chunk rents grew from $1,779 to $1,839 per month. Occupancy was basically flat during this period moving from 95.08% to 95.02% year-over-year. It appears that some landlords favored pushing rents in this period vs. maintaining extremely high occupancies. 95% occupancy still indicates a very healthy market, particularly when factoring in the decline in housing construction activity in the region, as the overall rate that new
housing is delivered in the region is likely to decline in the near term, which should help occupancies remain strong.

In the Northern Weld County (Greeley, Evans & east Windsor) area where there has been a significant amount of new product delivered recently, occupancies decreased slightly, moving from 95.89% to 95.25%, year-over-year. Average asking rents, per square foot, per month, were flat during that period, remaining at $1.76. Asking chunk rents grew slightly during this period, increasing from $1,641 to $1,647 per month.

The Class A apartment market in Northern Colorado appears to remain robust with continued demand and likely decreasing supply in the foreseeable future at least for a period of time until interest rates decline, costs decline (quite unlikely) or rents increase. While 30-year mortgages remain nearly 8.0% (which should limit renters from moving into homeownership as quickly as they did over the past several years), I expect to see strong future demand for new apartment units. With all of the headwinds that make it difficult, expensive and a painstaking process to deliver new units in the region, I anticipate that the market will remain strong, as long as demand for new housing continues, and there is a high likelihood, we’ll see high rent growth in the coming years unless a major microeconomic dynamic changes in the market.

If rent growth remains decent to strong (as I believe is fairly likely), cap rates don’t rise significantly from where they are now (latest institutional trades in the high 4s to about 5.0%), 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. I expect that the next year will be telling in which direction these very important factors are headed, but for the foreseeable future, I am quite certain that there will be much less housing produced than we have seen in the recent past.

"Northern Colorado Class A Apartment Market Holding Steady", written by: Jake Hallauer, CCIM, President, NAI Affinity

Source: CREJ - Multifamily Property Quarterly - November 2023, pg. 6

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