Multifamily commercial real estate has been a sweet spot in Northern Colorado, benefitting from the attractive housing prices of the last few years. Last year, Northern Colorado experienced record sales volumes that netted $644 million on about 60 transactions – nearly three times the region’s previous high. Through the first three quarters of last year, nine properties of more than 100 units traded hands, totaling $360 million in sales volume. During the comparable span this year, four properties have sold, representing $167 million in sales – less than half the amount transacted in 2016. We now have the last quarter of 2017 to meet the typical regional level of six annual transactions involving 100 units or more.
Our region continues to attract large investors from around the country who recognize the value of Northern Colorado’s stable employment market, strong post-recession performance and appealing inventory levels. All of this is buoyed by the growing interest of people wanting to live in this region to attend school, work and retire.
That said, last year was an anomaly. The inventory in the Northern Colorado market is not large enough to accommodate that sheer number of transactions year in and year out. In 2017, the acceleration in rent and property value growth we saw in 2016 started to stabilize.
Although overall sales have normalized, opportunities continue to exist. We are seeing increased inventory in the market, including from older properties that haven’t changed hands for many years as owners decide to cash out while prices are so attractive.
Multifamily investment remains desirable for several reasons. The ability to hedge risk by having many tenants in smaller priced investments is appealing to investors – if owners lose a tenant, there’s generally somebody out there trying to find a place to live. On the other hand, if an office tenant leaves, it does not necessarily mean that there is another company searching for a place to put its employees.
Most of the investment in the region is from local and regional investors who fully understand the region’s dynamics and can be near their investments. However, we have seen an increase of institutional investors from around the country who are realizing the strength and desirability of Northern Colorado. And the institutional investors are very satisfied with their positions in this market.
One significant indicator is the substantial number of national developers with multifamily construction projects either out of the ground or in the pipeline, which conversely is a reason for the slowdown in rent and value growth along with increased vacancy, all contributing to some apprehension in the marketplace.
The current construction pipeline of the Northern Colorado market, which includes Larimer and Weld counties, has 6,000 units under construction or planned, significantly above the typical-year numbers of 500 to 1,000 units. This considerable number of properties being added to our market include approximately 4,000 market-rate units, 1,200 student-housing units, and another 1,000 units of affordable and senior housing.
The aggressive construction over the last few years has been decently absorbed. But in the last quarter we saw absorption soften. Incentives are edging their way back into the market, and vacancy is starting to climb with these new units coming on line.
Immigration into the region remains strong, between 2 and 3 percent per year. There appears to still be strong demand from students, companies and retirees choosing to locate here. Just as robust are the numbers of people relocating here for good jobs and quality of life, particularly from the Midwest, Texas and California.
We are at that interesting moment in the market when we will see if the intense activity will pay off for investors who were enticed by our low vacancy rates and steady demand. Will the sheer number of units being added match the population influx?