Investors Look to Smaller Markets for High Yield Spreads

Eagle’s Nest Apartments, a 30-unit apartment property located at 1041 W. 24th St. in Rifle, CO, has sold for $1,650,000, according to Skyler G. Cooper, regional manager of Marcus & Millichap’s Denver office.

Greg Price and Jason Hornik, investment specialists in Marcus & Millichap’s Denver office, had the exclusive listing to market the property on behalf of the seller, a limited liability company. Price and Hornik also secured the buyer, an unamed private-capital firm from the Midwest — with more than 10,000 units held nationally.

The sale highlights a growing shift of traditional core buyers toward smaller, tertiary markets in search for higher yield spreads. Although Eagle’s Nest Apartments is a stabilized property, it offers opportunity for increased cash flow through adjustment of several management inefficiencies.

“By streamlining payroll the buyer will be able to push the cap rate a point,” Hornik said.

Deals along the Front Range are trading between 5 and 5.5 percent cap rates, which has pushed a growing number of investors toward the less populated surrounding markets.

“Though investors have to underwrite lower growth rates and population growth, the ability to see higher cash flows up front helps them hit their required returns.  This property sold at a 6.6 percent cap,” Hornik said.  “Without taking into account positive leverage, a property priced at a 6.6 percent cap produces 32 percent more cash flow than a 5 percent cap per dollar invested,” Hornik explained.

Photo courtesy of Marcus & Millichap

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