Published Expert Article
by Kenny Clarke
Associate Advisor at Pinnacle Real Estate Advisors

All things considered, the Colorado multifamily market generally performed well throughout the year in which almost everything else seemed to go wrong. It was the performance of one market an hour south of Denver that provided some insightful optimism leading into 2021 and beyond.

In a time where many markets across the country were mitigating large scale collections issues, in Colorado Springs, rents went up, according to CRE platform CoStar. Not only the rents rose during these hard times. In fact, the sales price per unit in Colorado Springs went up nine percent as well, while vacancy dropped just over a point (CoStar). What else is interesting is while absorption of units in 2020 rose by almost 200%, units under construction dropped by 13.7% (CoStar), flooding the market with demand for existing assets heading into 2021 Q1. This construction number is obviously due to the rippling effects of COVID-19 on our economy. Colorado Springs provides an ample opportunity for new development and sprawl. Expectations should be that new construction will be boosted throughout the summer, providing more optimism for investors in Colorado Springs. In fact, Mayor John Suthers celebrated this optimism at a recent topping out of the new Hyatt downtown. “Statistically it looks like we’re going to be the most resilient large city in America,” Suthers said, referring to new residential construction and planned projects slated to open in 2021.

This success should not be a surprise to many local investors, though undoubtedly some may feel like an opportunity has been missed. Hindsight is 2020 after all.

Over the last 5 years, The Springs market has experienced the same trajectory as the Denver Metro when it comes to rent increase, sales price per unit and declining cap rates, according to CoStar. The difference is in the new wave of demand sending more attention to Colorado Springs.

Employment and growth of industries within the private sector has led to increased demand for housing, higher wages, and in turn, the highest cost of living in a quarter of a century, according to the Colorado Springs Gazette. The growth of the private sector is a key driver in the booming Springs market. What was once a city dependent on its military bases has now blossomed into a balanced economy. The overall aerospace industry has attracted Hewlett-Packard and 17 other electronics companies of which employ about 10,000 people, according to City-Data. Retail titan Amazon has made its presence known throughout the state, but in Colorado Springs in particular. The planned 3.7 million square foot Amazon facility near the airport is on track to open in 2021. Aside from the industry giants, education and healthcare opportunities have grown. The mining industry remains a top employer. And of course tourism that has provided a bed of stable income for the city, employing nearly 20,000 people and drawing almost 500 million dollars in earnings. Visitors spend over 2 billion dollars in the greater region annually, all according to the Colorado Springs website.

It is interesting to consider that remote work and learning has significantly reduced the burden of commuting for Colorado residents, meaning many Denverites now may have the luxury to capitalize on suburbanization and find themselves house hunting down south in the Springs or up north towards Fort Collins. This, in turn with the growing private sector, influx of renters, investors moving equity from other asset types, out of state equity, and the Fed’s rates hovering close to zero provides a very tight playing field. To paint a picture, Colorado Springs still boasted a sales volume of just short of 700 million dollars in 2020, despite a depressing 12.4 million Q2. That’s still 172 million dollars more than 2019, and almost 60 million more than 2018. This was helped by a strong Q4, which saw 283 million dollars in sales, all according to CoStar. Sales volume in Q1 will be a strong indication of what is to come in Colorado Springs.

While on one side, the growth of the multifamily market in Colorado Springs is a massive benefit to investors, it’s also obvious that returns are diminishing on entry throughout each hub within the state. Out of state investors are looking at Colorado to be a saving grace, but plus six percent cap rates have become more and more rare. The overload of demand has driven cap rates down closer to five percent in Colorado Springs, where returns actually remain one of, if not the highest in Colorado on average, according to CoStar. So while it may seem like a true seller’s market, which it is, there also exists a unique opportunity to capitalize on the declining economics as a buyer before returns on entry diminish further.

Colorado Springs was a market that was once overlooked for years. In the recent past, it has become increasingly attractive to investors, specifically value-add investors, looking to take advantage of the market’s financial trajectory. Many have bet on appreciation and have enjoyed the results. We’ll see where we go from here in 2021 but all things considered, we’re doing just fine.

Featured in CREJ’s February 2021 Multifamily Properties Quarterly