CREJ – Multifamily Properties Quarterly – August 2024
The case for development and investment in Northern Colorado has never been stronger with economic growth reaching new heights. Reported by the State Demography Office, Larimer and Weld Counties added more net new jobs – in absolute numbers, not just on a percentage basis – than the City and County of Denver in 2023. Moreover, State demographer data revealed that 50% of Colorado’s population growth occurred in Larimer and Weld County in 2023.
But, 2023 is not where the story ends. The runway in Larimer and Weld County remains long. In Greeley alone, the city is projecting a total buildout population of approximately 500,000. For reference, the population of Greeley crossed over 110,000 in 2023.
Northern Weld County has especially experienced historic population and job growth resulting in positive tailwinds for apartment deliveries. Combined with a favorable development and water policy, Greeley / Evans delivered approximately 1,400 Class A institutional size and quality market rate units in 2023 and approximately 550 in the first two quarters of 2024. Of those deliveries, there are five communities still undergoing lease up with an average vacancy rate of 38.2% (CoStar, July 2024). Notably, these communities are commanding nearly a 5% premium on chunk rents, equating to an $80 per month premium, compared to older Class A product (CoStar, July 2024). Phase one of the Ledge Rock Apartments, at Interstate-25 and Highway 60 in Johnstown, intends to deliver 252-units in 2024 and is the only community under construction in northern Weld County.
Despite the historic wave of deliveries, the northern Weld County apartment market demand has remained robust. In the past 12 months, 937 units were delivered, 1,381 units were absorbed, and rent growth increased to 1.7%, up from 0.7% this past April (CoStar, July 2024). With limited deliveries projected through 2025, we anticipate that the market will continue to rapidly absorb product and rent growth will rise due to limited future supply.
The law of supply and demand alluded to above is best illustrated by the juxtaposition of a supply constrained neighbor, Fort Collins. In 2023, there were zero Class A market rate apartment units delivered in Fort Collins. Resultingly, Fort Collins experienced 4.63% rent growth (NAI Affinity, April 2024). Based on submitted development proposals, we estimate that under 500 units will be delivered per year over the next five years in Fort Collins. This lack of supply directly contributes to a higher cost of housing where nearly 60% of renters and 20% of homeowners in Fort Collins are cost-burdened (City of Fort Collins Housing Strategic Plan, 2021).
Within the last 12 months, institutional demand for multifamily assets in Northern Colorado was limited to three transactions, just in Larimer County, and none of which occurred in 2024. The most recent institutional transaction is Centerspace’s, a publicly traded REIT, acquisition of the 303-unit Lake Vista community in October 2023. This Loveland property traded for $94,500,000, or $311,881 per unit, at a 5.13% cap rate, which was below the national average multifamily cap rate by approximately 75 bps at the time, and included a debt assumption with a June 2026 maturity (CoStar, July 2024). Northern Colorado’s strong market fundamentals contribute to compressed cap rates that often remain lower than the national average.
However, if there have been no sales of institutional sized multifamily assets in Northern Colorado in 2024, then what multifamily assets are investors buying today? According to CoStar’s database, there have been 11 multifamily transactions across Larimer and Weld County in 2024. These transactions range from 4-60 units with the vast majority being under 20 units.
The rapid rise in the federal funds rate and interest rates generally sidelined institutions providing opportunities for “bite sized” deals primarily financed with lower loan-to-value ratios or 1031 exchanges. Investors who were unable to deploy capital in 2021 and 2022 due to heavy competition are now entering the chat.
Additional considerations for interest rate sensitive buyers are multifamily properties offering assumable loans or decent seller financing terms. We found that properties offering either financing tool received greater attention from potential buyers and would end with a successful transaction. For example, NAI Affinity represented the sellers of a 16-unit property in Estes Park with a 4.18% assumable Freddie Mac loan expiring in 2030. This property was sold on March 21, 2024, to the Estes Park Housing Authority for $4,800,000 which reflected a 4.71% cap rate. The assumable loan, coupled with the Estes Park Housing Authority’s mission and a high barrier to entry market, contributed to the successful transaction with a lower-than-average cap rate. According to CoStar, the average market cap rate for multifamily sales is currently 5.1% and 5.9% for Larimer and Weld County, respectively. Nationally, the current market cap rate average is 6.0% (CoStar, July 2024).
Northern Colorado’s development and investment landscape is succeeding with the region leading the way in job creation and population growth. Robust housing demand absorbed the substantial apartment deliveries in northern Weld County, while constrained supply in Fort Collins emphasizes the importance of strategic development for housing attainability. Despite interest rate challenges, the multifamily investment market remains active, especially in smaller transactions with favorable financing terms. Northern Colorado is well positioned for continued growth and investment opportunities.
“NoCo Class A Apartment Market Runway is Long”, written by: Lauren Larsen (Managing Broker, NAI Affinity) and Brecken Schaefer (Project Manager & Real Estate Analyst, NAI Affinity)
Source: CREJ – Multifamily Properties Quarterly – August 2024, pg. 10