Multi-family investment sales continue to outpace other CRE sectors

Northern Colorado multi-family investment sales have smashed office, industrial and retail transaction volume since New Year’s Day.  We are defining Northern Colorado for the purposes of this article as Larimer and Weld counties. According to the Costar Group Inc., multi-family sales volume in 2019 has amounted to more than  $275 million spread across 17 transactions. This is nearly double office, retail and industrial combined sales volume in the same geographic market. Yet according to the same data source, office, industrial and retail property types carry higher returns and lower vacancy rates than multi-family. The average capitalization, or cap, rate for multi-family sales since the beginning of 2019 is 5.5 percent in Northern Colorado.  Comparatively, office, industrial and retail year-to-date investment sales are averaging 7.3 percent, 7.6 percent and 6.5 percent, respectively. Why are multi-family properties controlling the investment market in Northern Colorado by such a large margin and why are investors attracted to this property type despite the competitive landscape?

Different than any of the other market sectors, multi-family property in Northern Colorado has attracted out-of-state and sometimes international private equity and institutional investment interest. By volume these buyer types amount to 96 percent of the multi-family investment sales in 2019.  Of the 17 recorded transactions since the beginning of the year, six transactions were over $15 million, with all buyers out of state.  For the private investors, the remaining 11 multi-family transactions this year in Northern Colorado still carry a low average cap rate of 5.6 percent. The investor pool for multi-family property is larger than alternative types of commercial real estate due to low barriers to entry, ability to control asset value, scalability and the intrinsic hedge against vacancies and market volatility. These factors keep multi-family in the forefront of real estate investment in Northern Colorado.

Multi-family investment offers lower barriers of entry when compared to other types of commercial real estate. Many local investors start with single family homes and expand into multifamily investments as their wealth and comfort grows. The “gross” lease structure generally used in multi-family leasing makes accounting easy for investors to self manage their own properties. These leases are generally set to renew annually, which allows the owner to re-evaluate the lease rate against building operating costs, and adjust accordingly. Multi-family commercial real estate tends to appreciate at a smooth, steady rate over time in comparison to other investment types. Since 2009, the average price per unit in Northern Colorado has increased over 300 percent going from $60,000 to over $180,000. During the same time frame, average office price per square foot increased from $100 to $180 or 80 percent. 

Multi-family owners enjoy their ability to implement immediate adjustments to increase net operating income (NOI) and thus directly increase the value of their investment.  Owners who have scaled their operations are also able to reduce expenses and create operating efficiencies.  The owner’s ability to actively manipulate the NOI directly affects the property value. In very simple terms, assuming the prevailing cap rate in Northern Colorado is 5.5 percent, for every $1 NOI is increased, the value of an investment property proportionally increases by $18.18. Here’s the math:  $1 increase in NOI ÷ 5.5 percent cap rate = $18.18.  With this, you can see how important it is for investors to manage their asset to the dollar. 

The Colorado State Demography office predicts both Fort Collins and Greeley to double in population in the next 30 years. Fort Collins ranked 9th nationally in 2018 for year-over-year nonfarm job growth of 4.4 percent. Lastly, Colorado State University continues steady enrollment growth (2018-2019 enrollment of 33,877 students) and investment in facilities on and around campus. Multi-family real estate is predominantly driven by population growth, employment growth and education expansion in any given area. These are a few of the many indicators that Northern Colorado will continue to foster a robust multi-family investment market to both local and non-local investors.

Jake Arnold is director of brokerage for Waypoint Real Estate, a Fort Collins-based real estate firm 970-632-5050.

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