GRS Group recently exhibited at the Colorado Real Estate Journals Multifamily event held at the Inverness Hotel and Conference Center just outside Denver. With Denver, and Colorado more regionally, being such a hot spot for multifamily investment and development, most of the speakers touched on what to expect in the short term. Some takeaways include:
Denver Development Pipeline:
– Building in Denver is steady, and concerns about overbuilding have begun. The supply/demand metrics should be favorable for developments for 2-3 years or more.
– Most new units are being designed and built as either top of market or middle market rentals. Affordable units still lag behind and could cause an issue for low income Denver renters in the future.
The Denver Multifamily real estate cycle:
– We look to be later in the cycle. “The pie eating contest” now appears to be over; deals are requiring more scrutiny and diligence to get done (and done right). The days of “buy and make money” are almost over but opportunities do exist if you can find them.
– Experienced operators are getting scared off with some deals. Some don’t pencil for future returns on buy and hold deals. We are getting closer to “top of market” pricing, if not already there. Deal structure, financing and operation will dictate good deals going forward.
Denver market is still in good shape:
– Institutional quality. Denver is one of the very few non-coastal cities that qualify for this designation.
– Denver is still home to a hot housing market which means many cannot come up with the ever-increasing down payments or qualify for the loan. This is favorable to the long term viability of Multifamily.
Capital Markets outlook on Denver:
– The caution flag in Denver is being raised with capital sources but only on select deals. This is primarily due to the number of units either under construction or coming online; and questions will persist as to whether the market is softening. Nationally, Denver is still better positioned than most. Denver is still top 5-6 nationally with San Francisco, Southern California, NYC and Washington DC.
– Buyers were favoring floating rate loans with value add in the last 12-18 months. Then, operators would exit after the rehab and pay the 1% penalty. Generally, we are not seeing the same structuring now. Overall the market has moved to favoring fixed rate loans. As the Fed’s short term rates went up early in the year, fixed rates loan rates went down closing the spread. That, combined with possible future rate increases, are making fixed loans more attractive. Equity in the deal, sponsorship and the business/exit plan is key now.
– Borrowers are typically getting a year to two of interest only payments. But that’s changing a bit and the amount of I/O a borrower can get is now deal specific. The main thing lenders look at is refinance risk. Higher leverage will mean a pullback on the ability to get longer I/O terms. Under 70% LTV deals still make longer I/O terms workable, but it will likely get harder in the near term.
– Banks are not as aggressive as the agencies for pricing multifamily deals, yet.
– Generally speaking, spreads today for bank and life company loans are low 200 bps and agency spreads are roughly 230-250 bps on 10 year loans – property type, location, etc. still play into these numbers. Capital Markets people do not expect a big change unless the agencies get close to their lending caps – which was late Spring/Early Summer last year. Bank lending costs are based on cost of capital and Life companies are tied to treasuries. Both aren’t expected to change in the short to mid term.
– Freddie and Fannie are now running SBL competing with Chase and local banks. 5-50 units used to be excluded, that changed and is now a big push for the agencies. Under $5M, we’ll see many more done in Denver in this program.
Trends to be aware of:
– New bank regulations for credit and risk on commercial lending portfolios are being implemented. Income producing stabilized MF is excluded from these regulations. This is very helpful to apartments as an asset class. These means that banks are likely to want to lend on multifamily more to avoid these regulations, but a the same time they could negatively effect construction financing. Bank lenders will be aggressive to compete on apartments going forward.
Concerns for Denver:
– Global market downturns that, while the US economy seems to be insulated now, begin to creep into the U.S. and effect the economy as a whole.
– Vacancy or rent shocks beyond expectations could mean the current stable market conditions change.
– The black swan event
All in all, the outlook for Denver has been rosy and remains so. Denver should remain one of the US markets that shine for Multifamily. If you have a deal here (or anywhere in the country), give me a call. I am happy to help.
With offices across the United States, Europe, and affiliates around the globe, GRS Group provides local market knowledge with global perspective for institutional real estate investors, occupiers and lenders worldwide. The GRS Group team has evaluated and advised on over $1 trillion in CRE transactions.
GRS Group delivers an integrated suite of services including Financial Advisory, Transaction Management, Assessment and Title Insurance. Jeff Coyne is one of our single points of contact, capable of leveraging the GRS Group portfolio of companies, and delivering customized solutions to assist our clients in achieving their investment goals.