By Miles King, CCIM, Associate Broker, Colorado Group, Inc., Realtor

Most of the US seems to have been enjoying an improving and expanding MF (multifamily) market for close to eight years now, so softening or weakening fundamentals should not be a surprise to anyone.  A CBRichard Ellis research report indicated apartment vacancies hit a bottom of 4.6% in 2015 and are expected to reach 5.2% and 5.3% nationally in 2017 and 2018 respectively. According to Kenneth Riggs Jr. MAI, CCIM, president of Situs RERC, the biggest challenge apartments face in most national markets is now excess supply. New construction has been causing downward pressure on rents and a general softening of the MF market. Many now believe that rents have peaked, and are faced with an affordability constraint, and also that price appreciation has slowed significantly.

Denver MF Market:

The Denver vacancy rate has been gradually increasing over the past year and now appears to be above the 6% range. Much of the market is losing pricing power, especially in the Central Business District (CBD) where vacancy rates have surpassed 9%. According to Cary Bruteig, MAI and Owner of Apartment Insights, Denver Metro’s vacancy rates have been increasing for the past 10 quarters and are now at the highest level in 7 years.

Boulder MF Market:

Boulder’s affordable housing inventory has experienced two major recent purchases. According to Jill Jamieson-Nichols with the Colorado Real Estate Journal, Boulder Housing Partners (BHP) purchased the 185 unit Tantra Lake Apartments, of which 75 will be permanently affordable, for $45.6 million.  And recently a large Boulder apartment sale of the permanently affordable 71 unit Depot Square Apartments at 3195 Pearl Parkway closed. The sales price was $13.6 million for the certified LEED Gold property which was built in 2015 to satisfy Boulder’s moderate-income housing requirements for the developer of the nearby Class A Solana Apartments. The resulting sales specifics were well below Boulder’s average sales metrics at only $173,000 per unit and $118,262 per bedroom. The property was generating an estimated Gross Income of $1,080,000 and had an estimated Cap Rate of 5.6%. One would expect that this going in Cap Rate would be above market due to the permanently restricted moderate-income rents. Fixed rents make the real estate investment somewhat similar to a bond.

The 138 Unit complex, located at 970 28^th St. and known as 9Seventy Apartments, sold for $57 million, with a mix that included 6 studios, 30 one-bedrooms, 82 two bedrooms, and 13 three bedrooms.

1701 Walnut St. was another significant sale, because the sales price of $15.6 million for the 26 unit, 2-year-old property set sales records at $653 per sq. ft. and $600,000 per unit.

Boulder vacancy rates have been increasing over the last 12 months, and currently, appear to be in the 7% range. Todd Ulrich, the owner of PG Rentals Property Management in Boulder estimates the overall Boulder vacancy rate to be around 7%, with slightly lower rates on Uni. Hill and Central Downtown locations.

There are at least two significant future multifamily planned developments in the planning process. One proposal is for the city-owned 4.3 acre Pollard site on the northeast corner of 30^th and Pearl streets. The plan calls for 304 new housing units, including 161 rental units for those making 30% to 60% of the area median income.  These would include co-housing units, and ownership units for middle-income owners, along with an additional 114 market-rate apartments. The Pollard project is a public-private partnership between Boulder and Zocalo Development with Boulder donating the land.

A second proposed apartment community is further East at 5801 Arapahoe Ave. where Zocalo purchased 15 acres and anticipates building approximately 300 apartments with an additional 10,000 sq. ft. – 15,000 sq. ft. for commercial amenities.

Financing

MF mortgage interest rates are still attractive for investors, in spite of the continued anticipation of increased short term rates by the Fed. Several in the mortgage lending business projected long term interest rates to increase by a full percent by the end of the year. At this point, rates have not reached that level. However, even a casual observation of recent MF sales shows significantly lower loan to value and loan to cost percentages. There appear to be more loans in the 50% to 70% LTV range on large transactions. And new MF construction loans have become harder to obtain.

MF mortgage rates for 5 units and above are typically in the neighborhood of 4.3% for a 10 year fixed period, with a 30-year amortization. And there are lower rates for shorter fixed interest rate periods. However, underwriting may become more expensive and more limiting, with lower LTV and LTC ratios; probably closer to the 65% to 75% range.

According to Lou Barnes at Premier Mortgage, loans for 2 to 4 unit properties with max loan amounts of $815,000 and $1,017,000 currently have rates of 4.375% and 4.625% respectively.

Boulder Sales Metrics

The third-quarter sales metrics indicate a softening in the Boulder market by way of modestly increasing Cap Rates, and decreasing GRM’s,  Prices per Sq. Ft., Prices per Unit, Prices per Bedroom, and Monthly Rents per Bedroom. Below are the combined un-weighted Boulder MF sales averages for all three quarters:

* GRM-18.0, Estimated Cap Rate- 4.0, Price per Sq. Ft.-$426, Price per Unit- $401,605, Price  per          Bedroom- $209,862, and Monthly Rent per Bedroom- $908.

Please contact Miles King, Scot Smith or 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. 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 as well as the current active listings based upon 6 different financial and property metrics. Each listing and sales transaction is grouped with other properties in similar locations.