Page 6 — Multifamily Properties Quarterly — November 2023 MULTIFAMILY: MARKET UPDATE A mid rapidly deteriorating capital markets conditions and uncertainty in the macroeconomy and global geopolitical landscape, the Northern Colorado Class A, insti- tutional-quality/scale apartment market remains relatively strong, overall. Recently, much of the apart- ment pipeline has been signifi- cantly delayed, or has vanished, for the time being. This is due to the historically rapid increase in the federal funds effective rate, and the subsequent rapid increase in inter- est rates, coupled with less attrac- tive 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 is extremely tough in this current environment for many developers to reach their threshold for unlever- aged return on cost to start a new project, so many projects have been delayed while developers watch the market. While the market has seen slow- ing rent growth over the past year relative to many recent years, so far, there appears to be continued popula- tion and employ- ment growth in the region. That growth along with the ever-increasing challenges developers face while attempting to deliver new product to the mar- ket 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 18 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 communi- ties. 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 con- ventional mortgages near 8%. 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 sup- plied, and 30-year mortgage rates stay anywhere near 8% while home values continue to increase, I expect to see another high rent growth period like we experienced com- ing out of the Great Recession and for much of the 2010s until very recently. According to our bi-annual mar- ket survey/report, which was just completed, stabilized communities in Larimer County experienced a year-over-year increase in aver- age asking rents, per square foot, per month, of approximately 3.7% with that rate climbing from about $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 dur- ing this period moving from 95.08% to 95.02% year over year. It appears that some landlords favored push- ing rents in this period vs. main- taining 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 and east Windsor) area where there has been a sig- nificant 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. Ask- ing 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 sup- ply 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% (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 likeli- hood, 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 4% to about 5% range), 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 impor- tant 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. s Northern Colorado Class A market holding steady Jake Hallauer, CCIM President, NAI Affinity