Investors today are looking West. Just as the pioneers recognized opportunity in the Old West, investors and developers are looking past today's negative real estate headlines and again looking toward the land of the setting sun for opportunity in some of the nation's most up-and-coming growth markets. Leading this category is colorado-springs-co/employment.aspx" title="See 15 charts and data on Colorado Springs, CO" target="_blank">Colorado Springs, Colo.
Just two years ago, Colorado Springs topped Money magazine's rankings as the “Best Big City” in the nation to live and work. Strengths of this area include quality of life, weather, health, and education. And while it has endured several years of flat performance, the local multifamily market is on the brink of a rebound—and that has many people taking notice.
MARKET UPTICK While the Colorado Springs apartment rental market has struggled with very little improvement for the past six years, it just last year began showing its first signs of progress. Average vacancy rates began dropping in 2003. The first real evidence of apartment rental increases began 18 months ago in the Class A units. Average rents have increased from $808 18 months ago to the current $876. This is typical of a turnaround in a rental market, where change begins with the nicest, and the newer, properties.
In 2003, Colorado Springs' apartment vacancy rates peaked at 14 percent. Since that time, vacancy has bounced around, but with a slightly improving trend. In 2006, the vacancy rate dropped below 10 percent, and as of the second quarter of 2008 was down to 9 percent, according to Phoenix, Ariz.-based Apartment Insights. Furthermore, Colorado Springs is seeing a strong improvement in the occupancy of newer apartments, which report a 7 percent vacancy rate. Citywide, net average rents increased last quarter by $8 per month, or 1 percent, to $637 per month, again evidencing market improvement. This upward rental rate movement is what has investors excited.
With all of this stable performance at play, Colorado Springs is hanging its apartment market hat largely on supply and demand. On this point, the market is well positioned, as its supply will not change—since new construction of apartments is minimal—but demand will continue to increase with Colorado Springs' constant population growth. The 2005 population estimate of 587,500 was a 9.3 percent increase over 2000, according to the U.S. Census Bureau. The 2007 estimate has increased to 609,000 in the Colorado Springs metropolitan area.
STRATEGIC DEVELOPMENT In 2008, less than 700 units are expected to come online, and only 622 units are expected in 2009. Increased construction and debt costs make new development difficult at current market rents. This will go a long way in helping supply catch up with demand. Construction is expected to level off the following three years as only 493 units are slated to be completed from 2010 to 2012, according to New York City-based REIS.
One of the first projects to come out of the ground recently is Alexan at Briargate. In March, Atlanta-based Trammell Crow Residential began development of the first phase of this community, which will feature 322 units in eight three- and four-story, wood-frame buildings. The project's 136 one-bedroom, 165 two-bedroom, and 21 three-bedroom apartments will average 976 square feet. Phase two, if initiated, could add another 156 units. The property will offer a state-of-the-art community center including a leasing center, resident center, and resort-style swimming pool. The resident center will house a business center, conference room, resident social hall, common area, and state-of-the-art exercise facility. All units will feature 9-foot ceilings, ceramic tile entry flooring, custom cabinets, walk-in closets, balconies/patios, and washer/ dryer hookups. This is Trammell Crow Residential's first project in Colorado Springs, with completion expected in the first quarter of 2010.
“The Colorado Springs market is maturing, with high-value private employment diversifying the economy and reducing the area's historic dependence on the military presence,” says Scott Nguyen, managing director for Atlanta-based Trammell Crow Residential. “At the same time, nearby military facilities are expected to benefit from the Base Realignment and Closure (BRAC) Act [of 2005], which reorganizes the U.S. Defense Department's base structure to achieve efficiencies and closes excess military installations. So, in addition to improving private-sector economies, we expect to see a meaningful population infusion in military-related personnel. For Colorado Springs, this is a very positive scenario, with the net result being a significantly increased demand for single-family and multifamily housing.”
Looking to satisfy demand from the nearby Fort Carson military base, which is one of the local bases that will benefit from BRAC, Atlanta-based Place Properties is expected to start development in the third quarter of 2008 on Independence Place at Fort Carson. Located in Fountain, Colo., a suburb approximately 14 miles from Colorado Springs, this military housing community will feature 300 furnished units along with a clubhouse, pool, volleyball court, and basketball court. Place Properties also is implementing a service for this and other military properties whereby soldiers from around the world can quickly lease a unit and even find a roommate, if necessary, on the property's Web site.
“This property is a Class A, for-rent community looking to house those soldiers and personnel related to BRAC that currently lack a quality, for-rent housing option in the area,” says Trevor Tollett, development manager for Place Properties. “With the support of the city of Fountain, we are a catalyst for future development of this area, improving infrastructure, such as bringing water and sanitation to this ‘front door' corridor of the city.”
BUYER'S MARKET When it comes to the colorado-springs-co/employment.aspx" title="See 15 charts and data on Colorado Springs, CO" target="_blank">Colorado Springs multifamily investment market, investors have realized that prices are near rock bottom. In 2007, the market recorded sales volume at $240 million. This amount was for only 22 properties, which is two-thirds of what closed in 2000. Only five large sales account for 60 percent of the 2007 total. This sales volume was up more than 10 percent compared to 2006 and among the highest during the past decade.
Also in 2007, sales of apartment communities with fewer than 100 units reached its lowest point in more than 10 years. Missing are the sales of older buildings to small investors. Instead, values of B and C properties have dropped as well, declining, on average, approximately $2,000 per unit per year since its peak in 2003. One factor in this decline is, of course, that lenders are becoming increasingly cautious. They are funding fewer transactions and charging higher interest rates, both of which result in lower values.
As a result, many buyers in today's market are sitting on the sidelines waiting to find the best deals of premier Colorado Springs properties in premier Colorado Springs locations. For example, two years ago, Seattle, Wash.-based Weidner Investments forecast the growth potential in Colorado Springs and acquired Sterling Pointe Apartments and Windtree Apartments, located in North Colorado Springs, encompassing 756 units with 97 percent occupancy, for $56.45 million. This was the largest-ever apartment transaction and the highest price per unit ever for 1980s built apartments (not including condo conversions) in Colorado Springs. When this sale was negotiated, the buyer was attracted to the upside in the growing Colorado Springs market. While the buyer understood that apartment values might continue to soften in the short term, it knew that properties of this quality might not be available had they not beat other investors to the table.
Despite such aggressive buyer behavior, that may not be the norm in the future. Over the next 12 months, some owners will be deciding whether to cash in on equity gains, even if it means compromising on their sale price, or to hold for the long-term, possibly up to nine years, when prices are expected to reach their next peak. In this buyer's market, investors such as Weidner that are motivated to invest will find fewer buyers to compete with. And if they are prepared to hold for the long-term, Colorado Springs may be their new frontier for profits.
Doug Carter is managing director at Sperry Van Ness.
MFE DOZEN: Raleigh, N.C. (January) A not-so-sleepy Southern town
Houston (February) Lone Star success
Huntsville, Ala. (March) A military movement
Lexington/Louisville, Ky. (April) No blues in the Bluegrass State
Seattle (May) A city on the rise
Orlando (June) A heated market
Kansas City (July) Feeling Midwestern momentum
Colorado Springs, Colo. (August) Rocky Mountain growth
Philadelphia (September) Independent streak
Columbus, Ohio (October) The heart of it all
San Antonio (November) Big-time development
San Francisco (December) Bayside building sets sail
FAST FACTS Considering Colorado Springs, Colo.?
Here's what you need to know:
- Population: More than 600,000
- Occupancy: 91%
- Median Age: 33.4
- Median Household Income: $60,131
- Average Rent: $637
Unemployment: 5.5% (as of Feb. 2008) NOTABLE: In 2006, Money magazine rated Colorado Springs as the Best Big City in the nation to live in. Colorado Springs is located at the foot of Pikes Peak and is home to the U.S. Olympic Committee headquarters and U.S. Olympic Training Center, as well as the U.S. Air Force Academy.