Denver’s multifamily market is changing, but rather than slowing down as some expect, it is evolving. Inventory has been rising, cap rates are rising slightly, and there are now many more choices available for buyers than just a couple of months ago.
Far from playing a part in a stressed market environment, these factors are allowing buyers additional time to analyze their investment options and are resulting in increased focus on underwriting over deal making.
According to the most recent Denver market data by LoopNet, active commercial listings have the average asking price at around $299 per square foot with an average cap rate of 6.64%.
More Inventory Is Giving Investors Greater Choice
For the better part of the past decade, multifamily investors were usually in a hurry since the market offered very limited inventory options and was highly competitive.
But things are changing in Denver’s real estate market.
Since there are now more apartment buildings available for purchase, investors have more time and opportunity to examine them carefully and decide on those which show real potential.
In addition, this change also correlates with the way investors describe themselves currently.
According to LoopNet’s investor survey, investors become increasingly careful about their decisions when it comes to purchasing property.
Instead of increasing the size of the portfolio quickly, 27% of investors consider renovation of the acquired property as the top priority, while another 27% build up cash in order to purchase property in distressed conditions.
Additionally, one in four investors expect not to purchase anything in the next year. It seems that investors find patience more valuable than quickness these days.
Firm Pricing Suggests Buyers Are Gaining Choice, Not Distress
However, increased selection has not yet resulted in weakening the value of properties.
LoopNet’s active listings suggest asking prices have remained relatively resilient despite growing inventory. The average asking price for Denver apartment buildings is $301 per square foot.
This gives the investors an ideal benchmark as now they have a point of reference while making decisions for investment in various projects in the market, especially considering that the buyers are becoming concerned with asset value, income potential and long-term performance.
It does not seem like the market is under stress in Denver but rather it is providing more chances for investors to evaluate the right assets.
For the investors, the issue is not only finding the best deal but the project.
Rising Cap Rates Are Favouring Disciplined Underwriting
Returns are changing as well.
The cap rate for the Denver market is 6.64%. This cap rate is based on active commercial listings in the Denver market, providing investors with a benchmark when looking over the available opportunities.
Obviously, higher capitalization rates cause investors to look at properties more carefully. Returns depend more and more on rental income, operating expenses, occupancy levels, and the ability to renovate.
This trend could possibly explain one other result of LoopNet’s investor survey. More experienced investors tend to place more importance on renovation than acquisition, concentrating on improvements rather than expansion of a portfolio.
Denver’s Property Mix Is Creating Value Add Opportunities
There are some changes occurring in terms of the nature of Denver’s active listings.
The data from the Denver market shows that there is currently an average of 17,500 square feet of commercial property listed actively, demonstrating the different possibilities available to investors in the market.
The diversity makes it possible for investors to take into account a wider selection of assets rather than limiting their choices to only institutional properties. Investors that follow value-add investment strategies may find enough room for improvement within smaller or mid-size real estate properties.
A Market That Rewards Strategy
However, despite the fact that there is a huge area for investment in the multifamily segment in Denver, the features of the investment itself are evolving.
The combination of increased supply, steady pricing, and rising cap rates has led to the emergence of the market where it becomes essential to execute thorough analysis and not be too aggressive.
LoopNet’s investor research suggests potential buyers act that way. The renovation of properties and preservation of cash become equal in importance as one of the priorities for investment. Most investors feel that it is better to wait for the right opportunities to present themselves rather than rush into expanding their business operations.
Denver’s latest market data supports that approach.
The increase in the number of listings implies the opportunity to make a better informed decision about the choice of a property to buy. Constant pricing does not allow investors to benefit from discounts on the market level. Rising cap rates require better focus on the performance, while changes in the list of properties offer additional chances for active investors.
