Colorado-Real-Estate-Journal_384812

Page 6 — Multifamily Properties Quarterly — February 2024 www.crej.com MULTIFAMILY: INVESTORS ¦á s s®»¦Â »Rsȥ qɤɤɤɤDzǯǯȥǭdzǫȥǯǭǯǯ » e.ɤ ɤgeɤ »ɤ¦ɤ¦. .s»ɤ£¦c. »® %.gRÚ.¦RsFɤ£.¦E¦q s .ɤ.à .gg.s .ɤɤɤ.Ú.¦áȥɤ»Rq.ȥ A s we venture into 2024, the metro Denver small mul- tifamily market continues to navigate through a land- scape shaped by economic adjustments, evolving housing demands and a transforming real estate sector. The multifamily sec- tor, particularly the small multi- family market, usually defined as properties with less than 50 units, always has been a dynamic seg- ment of the real estate industry in Colorado. Over the last 10 years, the metro Denver small multifamily mar- ket has experienced an incredible growth. The market has become increasingly popular among inves- tors due to its manageable size, robust rental demand, and lower barriers to entry compared to large multifamily investments. According to CoStar, the average market sale price per unit in the first quarter of 2014 was about $120,000. By the second quarter of 2022 the price has increased by nearly 220% when the average price per unit peaked at $262,196. In 2021, which was a record year for multifamily sales volume, some properties changed ownership multiple times. CoStar reported 941 small multifamily transaction records and 848 prop- erties sold in 2021, which means some properties were sold more than once in one year. Since the Fed launched its aggres- sive contractionary monetary policy in March 2022, the impact of the rapidly increasing borrowing costs changed the small multifamily market drastically. CoStar shows that in 2023 there were only 164 transac- tion records in metro Denver, a nearly 83% drop compared to 2021. High interest rates and stagnant rent growth along with skyrocketed operational costs made it hard to finance multifam- ily investments. The new market conditions put an upward pressure on cap rates, thus decreasing prop- erty valuations. The market cap rate in the first quarter of 2022 was at 4.73% and increased to 5.73% in the last quarter of 2023. We saw a dis- sonance between sellers and buyers where the sellers were still expect- ing 2021 valuations while the buy- ers were looking for a great deal. As most investors stayed on the sidelines during the second half of 2022 and all of 2023, today, undeniably, there is some pent-up demand when it comes to multi- family investment. This year looks promising with the expectation that the Fed will cut the rate at least three times by the end of the year. Although the interest rates and operational costs are still high, the fundamentals underpinning demand are still here. Let’s look at the key considerations that will impact the market going forward. Q New development. As far as the new supply goes, the metro Denver small multifamily segment is cur- rently better positioned than the large multifamily sector. The cur- rent inventory of the metro Denver small multifamily market consists of 4,635 properties with a total of 54,114 units. 451 units are under construction with only 80 units pro- jected to be delivered this year. This is a tiny fraction compared to 30,496 large multifamily units that are cur- rently being built and 11,672 units projected for deliveries in 2024. The large apartment market is expected to expand by roughly 10% in the next few years, while the small multifamily market will grow by less than 1%. This drastic difference in new supply volume is reflected in the vacancy rates, currently at 4.9% for small multifamily proper- ties and 8.2% for large apartment buildings. Q Affordability. Metro Denver has a drastic shortage of affordable hous- ing and most likely will continue to experience that for the next several years. According to CoStar, about 77% of existing small multifam- ily inventory is characterized as Class C, a category that offers most affordability and, therefore, the demand for the small multifamily rentals will continue. Q Demographics. Although the net migration to metro Denver has slowed in the past couple of years, the population growth projections look strong. Per Macrotrends, the current metro Denver population is more than 2.96 million. Accord- Metro Denver’s small MF market looks promising Oxana Eremiants, MBA Adviser, SVN | Denver Commercial CoStar Please see Eremiants, Page 22