Q2 2023
Multifamily Sector Begins to Stabilize Despite Challenges
Americans created 2.8 million new households between 2020 and 2022 as they emerged from pandemic lock downs, adding pressure to an overburdened housing market and aiding in the creation of a record number of new apartment units. Across the U.S. households reached 131.2 million as of November 2022, up from 128.4 million in 2020, U.S. Census Bureau data showed. Multifamily developers are reacting to the demand, resulting in unprecedented levels of development. Around 529,000 apartment units were started nationwide is 2022, the highest volume in 36 years.

Despite the growth in household formations and boom in development, the multifamily real estate market is grappling with a complex challenge of prolonged weakness in demand for units in the middle and lower-priced property segments. Lower-income renter households have been impacted by rising rent and inflation, leading to a decreased demand in markets with the largest rent increases. The drop in renter demand for mid and lower-priced units is having a significant impact on the overall health of the multifamily market. If absorption rates in the more-affordable three-star and one and two-star rated properties had remained stable in 2022, national multifamily absorption could have been 50% higher at 219,000 units rather than the recorded 146,000 units. Absorption declined by 70,600 units among the one, two and three-star rated properties in 2022, resulting in a higher vacancy rate at the end of 2022 of 6.7% instead of the anticipated 6.3%.
Supply Outpacing Demand - Rent Growth Slows

The demand for apartments in the Denver metro area has picked up in 2023, with net absorption amounting to 2,200 units in the first quarter. The momentum in the market has raised asking rents by 2.1% in Q1 2023. The average asking rent for a one-bedroom apartment in Denver is now $1,820 per month, up from $1,778 per month at the start of the year. The rent growth in Q1 2023 is a stark contrast to the previous five consecutive months of contracting rents as demand fell across the area in the later half of 2022; annual rents are up by just 1.6%, below the five-year pre-pandemic annual average of 3.2%.

Denver has a record 31,000 units under construction and supply is projected to outpace demand through the remainder of 2023, which will likely affect rent growth. CoStar’s base case forecast shows Denver rents decelerating, finishing the year with just 1.4% annual growth. New construction is concentrated at the top end of the market with more than 70% of the current construction pipeline consisting of four and five-star luxury projects. Competition for renters in this segment is eroding property mangers’ ability to raise rents. Over the past 12 months, annual rent growth in these properties dropped from 13.1% to 1.6%.

Fort Collins/Loveland/
Larimer County

The Larimer County submarket has an inventory of 26,979 units or 548 existing buildings, up 2.3% from the prior period, with 1,899 units currently under construction. 12-month net absorption is down 34% from Q2 2022. The vacancy rate sits at 4.8%, only a 0.2% increase from the prior period. Occupancy levels however are on the rise, sitting at 95.25%.

Annual rent growth is down significantly from Q2 2022 which saw rent appreciations of 8.9% from the previous period. Annual rent growth from Q2 2022 to Q2 2023 was only 3.1%. Even with the slow down in rent growth, market rent per unit is at an all time high of $1,574 per month. Market rent per unit is anticipated to rise throughout the remainder of 2023 with the projected rent per unit on track to reach $1,695 by the end of the year or a forecasted year over year appreciation of 10.6%. Three-bedroom units command the highest rental rate per month, where studios have the highest market asking rent per square foot.

The 12-month sales volume topped $549 million as compared to $533 million in Q2 2022. Market cap rates are at an all time low of 4.35%, reaffirming multifamily remains the preferred investment in the submarket. The market sale price per unit is $251,292, the highest price per unit of all time, which is a 6.8% increase from the prior period. Total sales volume for 2021 and 2022 was $1.4 billion in the submarket, which is equivalent to the total sale volume for 2014-2020.

Sources: CoStar
Greeley/Weld County

The Weld County submarket has an inventory of 19,692 units or 419 buildings, up 7% from the prior period. There are currently 1,636 units under construction, a 23% decrease from the previous period. 12-month net absorption is down 44.1% from Q2 2022, at 387 units. The vacancy rate increased 4.1% from Q2 2022, which now sits at 11.6%. Occupancy levels are at an all time low of 88.43%, signaling a potential over supply of units.

Annual rent growth is on the rise, with a 2.3% increase from the prior period, with a market rent per unit of $1,470, a record high for the submarket. Due to the explosive growth in population in Weld County over the past few years, market effective rent per unit is forecasted to increase year over year through 2027. Like the Larimer County submarket, three-bedroom units achieve the highest rental rate per month and studios demand the highest market asking rent per square foot.

Market cap rates crept up slightly from the prior period to 4.98%, with a 12-month sales volume of $90.3 million, down significantly from Q2 2022, which had a 12-month sales volume of $212 million. The market sale price per unit is $197,117, a minor decrease of 1.5% from the prior period.

Sources: CoStar
Uncertainty Breeds Inaction

The multifamily sector has been seeking stability after experiencing two major shifts; the Fed raising interest rates rapidly and then multifamily fundamentals quickly changed course as supply growth began to outpace demand. U.S. apartment sales ended this year’s first quarter at the lowest level in more than a decade as higher interest rates slowed demand. Apartment sales began slowing last year as the Federal Reserve pushed interest rates up to tame inflation. Some potential buyers haven’t been able to make the numbers work with interest rates that roughly doubled. Nationwide apartment sales topped $10.6 billion near the end of Q1 2023, which is the lowest sales quarter in the past decade.

The difference between what buyers want to pay and what sellers are seeking, has become a wide spread. The slow down in sales won’t be resolved until buyers and sellers adjust their views on valuation and meeting somewhere in the middle. To build on the divergence in valuations, there are much more willing buyers than willing sellers in the market; many potential sellers are holding off while they wait for a better time to sell.

Still "Preferred" Investment

Despite the decline in property valuations, multifamily is still the preferred investment. The National Multifamily Housing Council states that 4.3 million new apartments are needed by 2035 to meet demand, which also means affordable housing alternatives must be a part of new developments to meet current and future demand. Apartment industry leaders aren’t expecting sales to pick up to historically normal levels until later this year. Volatility in interest rates and the current upheaval in the banking industry has exacerbated uncertainty in the market.

Realtec is here to help navigate the changing market
CoStar Market Reports - Larimer and Weld County
Q2 2023
This quarterly publication is authored by Jamie Globelnik of Realtec Loveland