Some commercial and multifamily brokers derive pleasure from the sales process. Others enjoy crunching numbers to determine cap rates, internal rates of return or cash flow.
In a special class, however, are the deal-makers who thrive on creating a “big win” environment for investors, based on pre-sale market analysis, on an examination of high-return investment opportunities and a working knowledge of market dynamics.
The latter, as Ron Spraggins, president of Commonwealth Investments has learned, comes from years of experience – his own began in the mid-1970s. As a contemporary of Colorado Springs’ commercial real estate industry pioneers such as Steve Schuck, John Olive and Steve Engel, Spraggins founded the city’s first multifamily brokerage in 1975.
He once owned Broadmoor Villa Apartments, Glen Pond and Country Club Gardens. Today the veteran broker is mentoring his sons, Shane and Ryan, on the intricacies of the multifamily market and on what constitutes a good investment.
To owners and property managers such as Steve Engel at Griffis-Blessing, this attention to the subtleties of the business pay off in increased profits. “In our business you have to pay attention not only to what year a property was built and the rents a one or two bedroom unit will generate, but to the quality of the structure – the ‘class’ of property you operate,” he said. “You have to also figure in the cost of marketing and incentives.”
Investors focus of data-rich report
Engel credits Spraggins and Commonwealth with providing some of the cleanest and most helpful data available in the Pikes Peak region apartment market. The Commonwealth 2004 Apartment Market Survey, compiled and published in January includes data from 313 apartment complexes of 20 or more units and encompasses more than 30,000 apartments.
Unlike other analysts, including the University of Denver’s Gordon Von Stroh, who publishes the Pikes Peak Apartment Association’s market status report, Spraggins’ team breaks down rents and buildings, not just by quadrants of town, but into seven distinct neighborhoods.
“You can’t say that an apartment near Old Colorado City falls in the same category with newer product near MCI in Mountain Shadows,” he said. “And all buildings constructed pre-1980 are not alike. In Southwest Colorado Springs, you’ve got an older property like the Regency Towers Apartments which certainly qualifies as a Class A property. You can’t lump it in with average units built in the 1950s off Cheyenne Road or Nevada Avenue.”
The report defines Class A apartments as the “best” complexes in terms of location, amenities and quality of construction. Residents are typically white-collar and able to afford single family homes.
Class B units are in complexes surrounded by neighborhood settings. Amenities typically include a pool and formal play area. The properties are better maintained and have better curb appeal that Class C complexes. Tenants are described as young families and single parents who value school district location.
Class C properties are found in transition areas between commercial sectors and residential neighborhoods. They often are clustered with other apartment complexes, offer amenities similar to Class B complexes, but may not be as well-maintained. Tenant population is varied, and price, more often than location, is most important.
Commonwealth’s team also divides multifamily rents into “street rents” and “economic rents” – differentiating what asking rents are for new tenants in contrast to street rents minus concessions.
“Since the 11,000 troops were deployed a year ago, we saw complexes giving away everything from one or two free months rent to washers and dryers or bicycles to attract new residents,” he said. “Especially for investors who own 200 or 300 units, that cost mounts up and must be figured in to any P&L.”
Engle said that Spraggins’ analysis is “right on.”
“Like him, we are seeing tenants migrate from Class C or B apartments to the amenities of Class A complexes,” Engle said. “That has come about because low interest rates, a slow job market and troop deployments which created higher vacancies in all local properties. As a result, landlords have offered aggressive incentives and have lowered rents to attractive levels.”
That trend may soon level off, however. Returning troops have swelled occupancy rates at properties such as Creekside at Palmer Park, a $20 million-plus new Class A complex completed by Griffis-Blessing for an investor in 2002. A spokesman for the 333-unit property said a $250 move-in incentive continues, but a four to five percent vacancy rate means tenants are willing to pay anywhere from $800 to $1200 per month (on a 12 to 15-month lease) for a one- or two-bedroom unit.
Reflecting on past highs and lows
An individualist who doesn’t always subscribe to others’ definition of a “hot market”, Spraggins finds some top sales per unit statistics generated since 2000 to be contradictory. His office bases its work on the assumption that apartment investors like to buy low and sell high.
“Looking back, 2000 was the top of the market – the time to be selling, not buying,” he said. “Almost all who bought earlier in the 90s made fantastic returns. Class A properties that sold in 2000 for $84,000 per unit won’t see a positive return for years because the average price of Class A units sold in 2001 dropped to $71,000 and remain at that level in 2004. That means investors who have owned real estate for four years have not yet seen appreciation back to the price they paid in 2000.”
Through four recessionary cycles, the broker has made an avocation of tracking “street rents”, “economic rents” and tenant migration statistics, all of which are key to long-term investor gains.
In the preface to the January 2004 report, Spraggins included yearend 2003 migratory trends in the tenant population – noting that Class A vacancies were down to 12 percent while vacancies at Class B complexes soared to 17 percent. Perhaps surprisingly to those outside the industry, Class A complexes in good geographic areas were enjoying 90 to 98-percent occupancies.
Spraggins also notes that while “location, location, location” is an accepted real estate mantra, in the case of multifamily investment, “timing, timing, timing” may be more accurate. “I’ve seen investors lose money in a great location if they purchased at the wrong time,” he said.
To illustrate, he recalls advising his clients to buy in 1990 when vacancy rates hovered at 14 percent and had been higher than 12 percent since 1984. By 1994, vacancies had dropped to 1 percent. “The largest rent increases in our history occurred through 2000,” Spraggins said. “Building values rose on some complexes from $10,000 per unit to over $50,000 per unit. Once again, the idea, like all investments, is to buy low and sell high.”
the crystal ball
While Spraggins enjoys recounting stories of past “big win” investments – including a 4,300-percent return on one client’s $200,000 investment in the Wildridge Apartment complex, purchased for $4.6 million in 1991 and sold in 1993 for $8.6 million – he remains focused on the future.
“Our research indicates that the market will basically remain unchanged in 2004 unless new apartment households exceed the new units being added,” he said. “When this happens the vacancy rate goes down, allowing rents to start escalating, which in return, increases the value of the apartment complex.”
Commonwealth’s research reports that 300 units will come on line in 2004, but notes that 440 more are “on hold,” pending the return of a robust apartment market.
Spraggins sees the return of the troops as a boon to the market, but cautions that the privatization of Fort Carson
‘s post family housing is well under way. He points to 840 new apartments units added in Phase I, with additional units planned for Phase II, according to GMH Military Housing estimates.