High vacancies chill apartment market

“The market’s overbuilt, there’s no doubt about it,´ said Ed Stoner, president of Old Town Square Properties Inc. Stoner’s company manages 200 residential units in Fort Collins. “I would question anyone who would break ground today in this soft rental market,” he said. “It’d be suicide.”

Some lucky developers saw it coming. Gino Campana, a partner in Bellisimo Ltd., said the 222-unit Fossil Creek development in Fort Collins began as apartments, but the company sensed a drought creeping into the marketplace about 18 months ago. After testing the market with help from The Group Inc. Real Estate, Campana said the apartments were turned into condominiums midconstruction. “We sold them out,” he said.

But the present glut in the market is forcing many developers to be reactive rather than proactive.

Ken Merritt, owner of Loveland-based Landmark Planning Engineers and Architects, said at least two projects his company is involved with are being put on hold until vacancies are absorbed. The Ridgeview project, approved for 60 units on U.S. Highway 287 in Loveland, will be stalled at least until this spring, Merritt said.

And a 175-unit development at U.S. Highway 34 and Denver Avenue in Loveland will be held back as well.

“That project needs a significant amount of fill to progress,” he said. “With the vacancy rate where it is, there’s not as big a push to move it forward.”

The developers of Rigden Farm, a 1,000-home subdivision in southeast Fort Collins, have decided to give up on plans to build up to 300 units of rental apartments. Instead, the developers plan to sell that acreage for condominiums.

“It’s a reaction to what we think is an oversupplied market on apartments,´ said co-developer Bill Neal.

But Neal sees promise in some markets. He is not altering plans to build a 200-unit rental complex near the intersection of Prospect Road and College Avenue, close to the Colorado State University campus.

Consistent demand from students to live close to CSU insulates rental owners near campus from the overall softness in the market, Neal said.

“Also, with that project, construction won’t be for another year or two, and hopefully the cycle will start returning by then.”

McWhinney Enterprises in Loveland echoes that sentiment. Company vice president Nick Christensen said nearly 300 apartment units are planned for the Van de Water project on the south side of U.S. Highway 34.

Christensen, who described the recent spike in reported vacancy rates as “a blip,´ said his company is not discouraging developers from proceeding with the apartment project, which isn’t expected to be open for renters until late 2004 or early 2005.

“For the long term, the residential, multifamily, for-rent product in Loveland is a good product,” Christensen said. “The need is there.”

He questions the relevance of the 29 percent vacancy rate reported by the Division of Housing. “I suspect the new construction that just came on market is affecting the numbers. Often, it doesn’t lease up right away,” he said. “It’s not uncommon to have a substantially empty building fill up in the spring.”

Sam Betters, executive director of the Loveland Housing Authority agrees with Christensen’s assessment.

“I really think the numbers are an aberration,” Betters said. “Loveland is still a small enough community where a new project with over 100 units is going to have an effect on our marketplace.” He cites the recent 200-unit Peakview and the 160-unit Eagle Ridge apartment projects as temporarily flooding the market.

“I do think there’s been some overbuilding,” he said. “But give it a couple of months for some absorption to take place and I think we’ll see the rates go down to maybe 10 percent.”

Time will tell. The next Division of Housing survey will be released in May.

Betters said the vacancy rate in the affordable housing units is a different story.

Vacancies in units managed by the Loveland Housing Authority are closer to 7 percent, which he admits is higher than he likes to see, but nowhere near the 29 percent figure for market-rate apartments.

Higher-end apartments are seeing the biggest glut, and Betters recommends a cautious approach to any new development with units renting for more than $800.

Normally, a glut of apartments equates to a renter’s market, but so far it hasn’t affected Loveland’s rental rates.

The Division of Housing’s report shows Greeley rates remained relatively stable and Fort Collins showed a small decrease. But Loveland’s average rent increased nearly 20 percent compared to last year, possibly proving Better’s statement that the majority of new market-rate apartments are higher-end.

On the lending side, banks aren’t necessarily scared off by high vacancy rates, either. “The bank would consider how much vacancy a borrower could have and still adequately service their debt, said Roy Bischoff, senior vice president for Home State Bank.

“It may require a bigger down payment so the debt would be less,” he said. “But some could qualify whether or not the vacancy rate is high if they have enough financial strength.”

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