Market changes spur apartment construction

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While lower apartment vacancy and rising rents don’t sound good to tenants, they’re welcome news for the apartment real estate market.

Sustained vacancy rates around 6 percent, combined with continually rising rents, have cleared the way for new construction and high-dollar real estate transactions.

The Colorado Division of Housing released its quarterly vacancy and rent study last week, showing that vacancies dropped from 6.4 percent in the first quarter of 2012 (and in the second quarter of 2011) to 6 percent in the second quarter of 2012. That was coupled with an increase in average rent from $728 in the first quarter of 2012, and $740 in the second quarter of 2011, to $748 in the second quarter of this year.

With more than 18 months of good news for apartment property owners, there have been several sales of apartment complexes to owners planning to invest and add value to old properties, including a major portfolio sale Apartment Realty Advisors announced last week including two Colorado Springs properties in a four-property, $90 million sale to an institutional investor.

In addition, Colorado Springs has 575 apartment units under construction now that were permitted this year — and another 647 that were permitted in 2011.

“Everybody is really sensitive to supply and demand,” said Ken Greene, a broker with Apartment Realty Advisors. “There have been a number of announcements, and not all of them will be built.”

He said the market, which had 750 units of absorption in 2011, can handle the new construction. And that construction is welcome after nearly a decade with hardly any new building.

There were only eight multi-family-unit building permits issued in 2009, said Ryan McMaken, spokesman for the Division of Housing.

But it’s hard to say if rents will grow quickly enough to support those new properties, Greene said. He estimates that owners with new construction costs will need $1.15 to $1.20 per square foot. The current average rent per square foot is $0.96, according to the state report. But rent varies by the age of the building, and complexes built after 2005 rent for an average $1,118, which is about 38 percent more than the average market rent in Colorado Springs.

Rents aren’t quite where they need to be, in most cases, to justify new construction. But they’re getting close, which means they’re close enough, Greene said.

“The people who are building now, are building with the assumption that is going to happen,” he said. “I don’t think there’s any question it will, it’s just — how long is it going to take?”

He said most owners who build from the ground up probably have padded their estimates with up to 18 months for rents to rise.

“They’ll be fine with that fudge factor,” Greene said. “But if it takes five years, they’ll be in trouble.”

He added that he’s not worried about overbuilding. Lenders will continue to be cautious about what they fund, he said.

New projects currently under construction include Nor’wood Development Group’s North Pointe Apartments near the intersection of Rockrimmon Boulevard and Delmonico Street with 260 units, and its 315-unit First & Main Town Center Apartments. While there is plenty of scuttlebutt about others, including another Nor’wood project at Powers Boulevard and Woodmen Road, those are the only two projects permitted so far this year.

Nor’wood also is finishing construction its 240-unit Mesa Ridge Apartments in Fountain, permitted in 2011. Vision Development is nearing completion of its 177-unit Vistas at Jackson Creek apartment project in Monument. And the 230-unit Peaks at Woodmen just opened near the intersection of Woodmen Road and Union Boulevard.

Kevin McKenna, another broker with Apartment Realty Advisors, said he heard the complex was already 25 percent leased less than a month after opening. Representatives from Riverstone Property Management did not respond to requests for comment about leasing activity at the property.

“Those new units won’t flood the market,” Greene said. “But they could temper rent growth.”

While market rents only edged up slightly, effective rents climbed 7.6 percent year-over-year, McKenna said. The effective rent is the rent a property owner actually collects after offering incentives and concessions — things like “first month free” or “$200 moves you in.”

He said he expects new properties will offer big incentives and concessions to lure tenants and fill the property right away so it’s generating some income.

The concessions will never go away in the Colorado Springs market, McKenna said. Though they’ve slowed down, a lot of properties will always offer them. He said owners in Denver, where the market is much stronger, offer big concessions and discounts, but they mark up their original rents dramatically, so they’re still collecting more effective rent.

“Once you get concessions in a market,” he said, “it’s hard to get rid of them.”