Apartment market returning to ‘normal’ in 2012

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Many older apartment communities are now being bought and flipped for resale.

Colorado Springs’ apartment sales market seems like it’s hot right now, but the numbers suggest it’s just getting back to “normal” after a sleepy few years.

There have been announcements about big sales, institutional investors and properties selling here and selling there. Vacancy has dropped to 5.8 percent in the third quarter of this year, and rents have climbed 3 percent from 2011 highs to an average $757 a month.

Developers are even building again.

To look at it from the outside in, it seems like the apartment market is on fire. And maybe it will get there, said Doug Carter, an apartment broker with Sperry Van Ness and author of the quarterly Apartment Insights report.

But, so far, 2012 is shaping up to be an average year for apartment sales. There have been 21 sales so far adding up to $130 million. That’s ahead of 2011 year-to-date when there were 16 sales in the first nine months of the year totaling $55 million. Last year ended with 22 total sales.

But through most of the past decade, there has been an average of about two sales a month — 19 to 26 sales a year, Carter said.

In 2008, the last “normal” year for apartment sales in Colorado Springs, there were 18 closings in the first three quarters totaling $155 million. The average sale was $8.6 million for a 120-unit complex. This year the average is $6.1 million for a 120-unit building.

It wasn’t until 2009 that sales stalled, with only 13 sales in 2009 and 14 in 2010.

“During the 1980s, when there weren’t nearly as many apartments here, there were still more sales than that,” Carter said. “That’s how severe the chill was after 2008.”

The last time the apartment market was on fire, Carter said, was 2000. There were 33 apartment sales that year, almost three a month. New apartment building spiked just a couple years later and then vacancy rates shot up and rents fell.

The current market seems ripe for major growth. Throughout the past decade when sales were “normal,” vacancy was high. It pushed or was higher than 10 percent for most of the past 10 years. That meant owners had to keep rents low in order to keep tenants. There wasn’t any money to reinvest in properties.

If investors were buying low-rent, largely vacant buildings and paying more for them during the past decade, shouldn’t they be scooping up whatever they can get their hands on in these favorable market conditions, especially when prices and interest rates are both low?

The reason they’re not is simple, Carter said.

“Investors were getting loans just as easily as all the homebuyers,” he said. “There’s no easy money anymore.”

Lenders are cautious, he said. When it’s harder to borrow money to buy, even the most eager investor could be locked out. Banks are scrutinizing investors’ worthiness and looking at their apartment-ownership experience.

“There are no amateur investors,” Carter said.

The smaller, more affordable properties aren’t selling. It’s the rehabbed 1970s buildings that are selling now. To date, 16 sales of 1970s buildings have sold, totaling $87 million.

They’re going for an average of $44,000 per unit compared to $28,000 per unit in 2011. Investors bought them last year as fix-and-flips, Carter said.

“They’ve been fixed and now they’re being flipped,” he said.

In 2008, they sold for $37,000 per unit.

After almost no new construction in the past 10 years, there are plans now for seven new properties, which would equate to 2,000 new units if all were built. Many of them are already underway or even on the market.

The Peaks at Woodmen opened at Woodmen Road and Union Boulevard earlier this year. Complexes in Monument and Fountain are close to completion. Nor’wood, which is building the Fountain property, has broken ground on two of three announced projects in town.

“For the first time in this town’s history, local developers are driving apartment development,” Carter said.

Historically, national companies have built the properties and hired local managers or sold them right away.

It’s hard to say what that means. But this is a new apartment market and it’s different from what brokers have seen before — “normal” or not.