W ith real estate happy hours today sounding like an episode of “Doomsday Prep- pers,” and statements like “Survive ‘til ’25” becoming a common internet battle cry, it is an interesting time in the multifamily brokerage world. A perfect storm of stalled rent growth in metro Denver (which is up 1.1% year over year, compared to a high of 12.1% year over year in early 2022, according to CoStar), along with soaring interest rates and spreads, has led to compressed multifamily values. The average price per unit year to date for the overall Denver multifamily market is $308,660 per unit, down from the high of $322,558 per unit in 2021, and further down from 2022’s average of $312,335 per unit. Lower prices mean increasing capitalization rates. The average cap rate year to date has jumped to 5.3%, a significant leap from 4.6% in 2022, and 4.9% in 2021. The byproduct of higher interest rates is slowed transaction volume. YTD Denver multi- family transaction volume sits at $1.9 billion across 126 deals. This is down from $5.7 billion across 303 deals in 2022, and further down from the high of $10.4 billion across 474 deals in 2021. With lower sales volume comes sellers clinging to old, out-of-date comps, and buy- ers having less comps to back their underwriting. The disconnect between seller pric- ing expectation and buyer sentiment has been persistent, with bid-ask spreads leaving buyers and sellers too far apart to transact in most cases. With few sellers feeling the “pain” in the market just yet, days on market continue to increase, as many listings go after peak 2021 and 2022 pricing that is proving difficult to achieve. The result is sellers electing to pull their properties off the market with plans to reengage when a lower inter- est rate environment emerges. All the while, Federal Reserve policymakers threaten yet another rate hike, which has the market in a holding pattern, waiting for the tipping point. Sellers with attractive debt, or little to no debt, can afford to play the wait-and-see game. The rub is many owners who secured debt over the past few years will be left with less than desirable options as their debt matures. According to the Mortgage Bankers Association, as reported by Colliers, there is roughly $1 trillion of multifamily debt maturing by 2027. In a higher interest rate environ- ment, this will leave owners with the options of refinancing, repaying or selling the asset. Each of these options comes with its own set of complications. A property that penciled well at a 2.75% interest rate three years ago makes much less sense in the 6’s. Adding insult to injury, an owner is likely facing much tougher lending criteria when they do go back for the refinance, making this option tricky at best, and that is assuming the property even cash flows well enough to allow for new debt. This is leaving many owners with the only option on the refinance side being a “cash-in refinance” where they are being asked by the lender to bring more equity to the table. Unless the cash is on hand, a repay- ment of the loan is a difficult proposi- tion as well. Capital calls to investors are becoming commonplace, and this can be a very tough sell on an asset that the investor may feel much dif- ferently about now than at the time of acquisition. In a tougher lending environment, getting a buyer to pay the premium necessary to make a seller whole on a sale isn’t a slam-dunk either, but this very well may be the only option left. Owners need to be getting out in front of these conversations with their lenders and brokers now and Please see Bretz, Page 24 INSIDE Expect the next six to 12 months to bring a flurry of sellers to the market Upside of uncertainty Proposition 123 will generate around $300 million for housing stability Affordable housing PAGES 30-32 Over the last three years, Denver has seen a nearly 25% jump in rents Workforce housing PAGE 10 November 2023 PAGE 3 Sam Bretz Senior adviser, Capstone Divide persists but time for buyers to get aggressive