Rents Rise as New Units Lease; Competitive Bidding Pushes Prices Higher

Economy grows as market fundamentals attract younger, more educated workforce. Economic growth in Colorado Springs sparked increases in new employment over the past year. The growing professional services sector, including an expanding high-tech employment base, has helped the area retain many recent graduates from the University of Colorado, Colorado Springs, resulting in a younger demographic searching for apartments. Additionally, the metro’s skilled employee pool is appealing to more companies as the market’s housing is more affordable and has a shorter average commute when compared with the Boulder and Denver metros. For many who remain employed in Denver, the northern border of Colorado Springs is attractive as people desire to avoid the premiums associated with living in Denver. To keep up with demand, development is rampant across the market, with multifamily projects under construction in north Colorado Springs near the intersection of Interquest Parkway and Voyager Parkway. The elevated construction levels will cause vacancy to rise as rental demand will be outmatched by the new inventory until the recent completions are leased up.

Investors chase cash-flow opportunities, targeting older properties west of downtown Colorado Springs. The availability of Class B and C properties around the central business district has improved deal flow over the past several years; however, the 2018 transaction count was the lowest of the previous four years due to limited listings. While transaction velocity was down last year, the properties that did trade were sold for a much higher price per door, indicating a rise in competitive bidding for listed assets. Initial returns range from mid-5 to mid-6 percent, a slightly higher average cap than was posted in 2017. Vacancy is lowest in the West Colorado Springs submarket, which encompasses the area directly west of the Colorado Springs central business district. Investors looking for less hands-on management are targeting apartment complexes in this market. Market-wide, investors are evaluating exchanging equity earned as the metro’s average price per unit over the past eight years has more than quadrupled.

Employment

• Last year, approximately 6,400 jobs were created in Colorado Springs, a growth rate of 2.2 percent. In 2017, the employment base expanded by 2.7 percent.

• The professional and business services sector has been the main source of employment expansion recently as roughly 2,100 jobs were created last year. Looking forward, new opportunities in healthcare will be added as Centura Health recently bought 58 acres of land to build a new campus.

• Outlook: Job growth will remain positive this year but will slow down to 2.0 percent, or 6,000 new payrolls, as unemployment tightens and new hires are more difficult to locate.

Construction

• Builders completed more than 1,000 units over the past year, with three large projects contributing nearly 80 percent of the new supply.

• Construction will remain elevated moving forward. Three large projects with 2020 completion dates are already underway on top of the 1,200 units scheduled to finalize by the end of the year.

• Outlook: In 2019, apartment delivery will be 14 percent higher than last year, the largest annual addition in over 15 years. Development is focused in the northern portion of Colorado Springs, east of the I-25 at Interquest Parkway.

Vacancy & Rents

• The elevated pace of construction has impacted vacancy, with the overall rate raising 100 basis points to 5.0 percent during 2018. The rate gain was the largest year-over-year increase since 2004.

• In 2018, the average effective rent rose by a moderate 2.8 percent, down from the prior six years’ annual average growth rate of 5.9 percent.

• Outlook: Another year of elevated construction will lift the vacancy rate by 80 basis points to 5.8 percent in 2019 as the new units lease up. Overall, Colorado Springs rental demand will continue to support rent growth, lifting the average effective rent 3.5 percent to $1,087 per month.

Sales Trends

• Last year’s transaction velocity was down approximately 20 percent from 2017 as the price per unit rose 52 percent to $170,000. Fewer Class C trades this past year contributed to this large rise. Cap rates in the market continue to range from mid-5 to low-6 percent depending on property class and location.

• Most trades occurred in east Colorado Springs between North Hancock Avenue and North Powers Boulevard at an average of $127,000 a unit.

• Outlook: Investors will continue to scour the market for value-add opportunities in small Class B and C rental properties, particularly those located along North Nevada Avenue near the metro core. Sellers are motivated to capitalize on the equity gains made as Colorado Springs property values have appreciated.