CREJ – Multifamily Properties Quarterly – November 2024
The Northern Colorado Class A, institutional size/quality, apartment market continues to show impressive resilience amidst a large number of deliveries in northern Weld County over the last 30 months. NAI Affinity just completed our bi-annual survey of the Class A, stabilized, market in the region and northern Weld had slight growth in occupancy (from 95.25% to 95.50% year-over-year) and average asking rent/unit/month grew from $1,647 to $1,685 (2.31%) in that same period. This is tremendous resilience for such a large number of new units and lease-up in new communities has been brisk. The job growth and population growth has kept this trade area very strong with the last wave of deliveries, and there is much less under construction currently than there has been in a number of years. Presumably, this will result in occupancy growth and strong rent growth over the next few years.
The Larimer County market, while solid, didn’t see the growth in occupancy and rents that northern Weld County did over the same period. Occupancy was down ever so slightly from 95.02% to 94.97% and rents were down just a hair from $1,839 to $1,838 year-over-year. It is worth noting that newer communities experienced strong rent growth over this period, but older communities, while still Class A, did not experience much, if any, rent growth, suggesting that tenants are prioritizing newer communities.
Investment activity has increased as of late with several communities trading in September. While most of the investment activity remains on properties with assumable, attractive financing, one of these trades was at 4.51% cap rate as compared to the high 4s/low 5s cap rate range on the last few trades prior to these. This may suggest that there is higher investment demand, and given the relative lack of buying options coupled with the Fed finally cutting the Fed Funds rate, resulting in buyers being more aggressive on high quality investments despite the 10-year treasury yield being essentially the exact same as it was a year ago at 4.316%. The next few trades will likely be telling and should provide more pricing discovery for the market.
It remains quite challenging to pencil new developments given the costs and interest rates which are largely unchanged after the 50-basis point cut of the Fed Funds rate. This will likely result in many less deliveries over the coming years, and should demand remain fairly high for new units, I expect that the region will experience occupancy growth and potentially strong rent growth given what I project to be a coming housing shortage, particularly for new apartments. With 30-year mortgage rates hovering near 7.00%, I expect many would-be homebuyers to remain renters for the foreseeable future which should keep demand for new apartments higher than in some environments for the foreseeable future.
While the land market for development of these types of assets has picked up since the start of 2024, some developers continue to ask for significantly longer contract periods than they have in the past with the lengthier entitlement timelines in many municipalities than in the past and uncertainty in the capital markets. Again, this is a strong indicator that there will be many fewer units delivered in the future than in the recent past. With the timelines for entitlements and much longer construction periods (28-30 months in some cases), if a developer starts working on a site today, it’s likely that the delivery of finished units ready for occupancy will be 4-5 years out leading to a likely window where there are very few new units delivered in the market relative to the last cycle. The developers who have projects which still pencil or who are able to find creative ways to break ground in the next 12 months will likely deliver their projects into a very low new supply environment which should result in strong rent growth and occupancies between now and those deliveries, as well as strong lease-ups when those projects are delivered.
Assuming that the capital markets improve and interest rates/cap rates decline over the next 12 months, which I think is fairly likely, I expect an environment which will be much more conducive to new development in the future than we’ve seen over the past several years. Given the desirability of Northern Colorado and the continued job growth, I expect the Class A apartment market in the region to continue to grow and remain strong for years to come.
Source: CREJ – Multifamily Properties Quarterly – November 2024, “NoCo Class A Markets See Resilience, Bifurcation”, pg. 5, Jake Hallauer, CCIM, President, NAI Affinity