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

About one year ago, I wrote about the expected success of the Colorado Springs multifamily market heading into 2021. The results of 2020 were that of delight for many bullish investors focused on this growing Front Range market. As I write this today, much of the same sentiment remains. Only the sustained success of multifamily in Colorado Springs now offers a unique opportunity for those holding substantial equity in their long-time-owned multifamily assets. Of course, time is of the essence.

Cap rates in Colorado Springs have plummeted. In Q4 2020 the average cap rate on sales of multifamily properties built between 1899 and 1979 was 5.17%, per CoStar. If you’re reading this in 2022, things have changed. Q3 2021 showed us the first time average cap rates for this older vintage product dipped below 5%, and Q4 settled on 4.95%. Less than 10 years ago, cap rates hovered in the 7% range. These current cap rate numbers reflect the very little perceived risk in investing in Colorado Springs now. In the same period and for the same older vintage product, average sales price per unit dramatically increased from around $125,000 per unit to $163,000 per unit (CoStar). We expect this number to go up but cautiously.

This is great news for the belief in this city. Investors have a lot to like about the future of Colorado Springs and the potential for wealth generation. But this article is meant to serve current owners. The intense interest and subsequent growth of this city is promising, but also presents some future challenges for the long-time-owned family assets.
Population growth is a real driver in Colorado. In the Springs, population has grown over 100,000 people since 2010, per Census data. In 2010, the population of our state’s most extensive city was 622,263. In 2020, that number was 730,395. Not only is Colorado Springs the largest municipality in Colorado, but El Paso is the largest county in Colorado by population. This, like everywhere else in this popular state, is expected to increase.

With higher populations, higher demand for housing permeates. New multifamily construction is on its way. About 4,800 units for Colorado Springs currently in Q1 2022, per CoStar. This is new competition for workforce housing tenants and could dampen rent growth upside in C Class properties.

As more new construction properties are absorbed into the market, demand could loosen. The boom is now. Some of the biggest purchasers of multifamily in the last year were large groups of private equity from coastal cities. We have also seen massive institutional groups make huge investments in Northern Colorado. It’s only a matter of time before we see that sort of institutional and slightly sub-institutional equity chase outside their strike zone for product in Colorado Springs. And then what happens in 5-10 years, when demand is further fulfilled? Over the next several years, the blending of Front Range markets looms. New homes, new apartments, shorter commutes for many. This could mean demand for centralized living may not be as desirable as it is right now in this current moment.

Liquidity is obviously not an issue for multifamily in Colorado. What is an issue is that we are entering an inflationary environment with inevitable interest rate hikes. The cost of debt increasing means the ability to stretch pricing decreases. Stagnation is possible. There are still great returns to be made on low cap rates in Colorado Springs. This will continue and money will still be active. But the ability to really stretch that pricing and get the ultimate max value for that asset only exists in a finite window of opportunity.

In general, Colorado Springs has outperformed all expectations. It should be expected that the city will continue to outperform. The belief and the faith in the quality of living of Colorado Springs will solidify its desirability to investors for years to come. But with any city experiencing rapid growth and demand for growth, there will be challenges along the way. Living in Colorado is a transformative experience for many, and we should expect to see our cities continue to transform.

Featured in CREJ’s February 2022 Multifamily Properties Quarterly