Boulder Multi Family Market is Still Healthy
By Miles King and Paul Kreske
Many investors feel the downturn in the economy started in the 4th quarter of 2008.
However, when you look at the overall markets and the Boulder multi-family market in particular, the numbers reveal that the market downturn started towards the end of 2006 and into 2007. The Boulder multi-family market is a small niche market but remains relatively stable. Investors typically buy and hold their buildings, banking on increased rents and Boulder’s historical appreciation. The demand for quality units, and/or units located close to the University of Colorado has been, and remains steady and solid. Overall vacancy in the market is increasing to approximately 6.5 to 7%. Most of that vacancy occurs in areas beyond the University region.
The stability of the market is driven by several factors:
1) The most obvious is the University of Colorado which brings in an average of 23,000 students annually. These students either buy or rent. Their parents invest in the “college condo” or “college duplex” and then sell that property when the student graduates.
2) Government job and government job growth – Boulder is host to several government research agencies and brings in numerous temporary and permanent employees who need temporary housing.
3) General job growth – Historically, Boulder has seen increased job growth with a main focus on research, telecommunication, biotechnology and other high-tech industries. These employees enjoy living close to the employment center and tend to rent before they venture out to purchase property.
4) Boulder is known as a bit of never-never land surrounded by reality. Let’s face it – in spite of its reputation for eccentricity, Boulder is still a desirable place to live. However, the cost of living is high, so many who choose to live in Boulder are destined to rent if they wish to remain there. Boulder is surrounded by open space that cannot be developed. There is very little land left to re-develop or build new product, the entitlement process is long and expensive. All this combines to keep the demand and prices high.
From January 1, 2009, through June 30, 2009, Boulder had a total of 13 multi-family sales. There were a total of 26 closed sales in 2008, so this is on track for the 2009 year. However, current inventory stands at 37 properties, which is similar to the number of listings in 2008, but double the number of listings for sale in 2007. This gives us a 17-month supply. GRM and CAP rate averages for the first 6 month’s sales activity indicates a GRM of 14.1 and an estimated CAP rate of 5.1%. This is slightly higher than previous years in which GRM was averaging 16.1 and CAP rates were between 3.5% and 4%. The 2009 sales transactions ranged from 2 units to 161 units. The 161-unit sale is an unusual transaction for the market. The typical sale in Boulder is usually between 3-15 units. When a big project sells in town it turns heads. The property was not listed. It was reported as 149,000 SF and sold for $147 per square foot, a cost per unit of $136,025, and a cost per bedroom of $72,214. It may well be the largest commercial transaction in the area for the entire year. A more typical multi-family sale in Boulder is for projects between 3 and 12 units, with a price per square foot of $273, a price per unit of $258, 972 and a price per bedroom of $101,375.
CAP rates in the market are rising, although there seems to be an even greater disparity between the desired yield of investors and a seller’s price expectations. This trend is even more characteristic in today’s market due to the severe lending constraints. Cash or seller financing seem to be the key ingredients to successful transactions now. The traditional relationship between a buyer and seller being on opposite sides of a transaction has given way to the buyer and seller forming an alliance to work together to get the lender to fund the transaction with a minimal amount of conditions, delays and last minute changes.
It is no secret that the market has slowed as compared to previous years. However, it is one segment of commercial real estate where there is still some financing available. When you match the available financing with the amount of available inventory, investors are still able to purchase projects and obtain a respectable return.
