Investment levels in the U.S. multifamily assets plunged over the past 12 months. Sales of multifamily properties across the nearly 400 U.S. markets tracked by CoStar dropped by 61%; multifamily sales in the top 50 markets tanked by 63%. However, as is always the case, some markets weathered the storm better than others. The most common traits among the 10 markets that fared the best in the terms of multifamily sales volume are those with moderate rent levels and inventory and sales growth during the prior year. The Denver market, which ranked number seven of the top-10 pack, posted a 33% decline in its sale volume, shares something in common with virtually every one of these measured success factors.

During 2021 and 2022, a national multifamily investment frenzy occurred and was focused on markets with high population growth potential. Come 2023, investors shifted their focus and began to increasingly target areas with continued strong rent growth. Steady and stable rent growth has become an increasingly important metric when placing investment dollars into a market. The Denver market began gaining momentum in March ahead of the busy spring leasing season, where rents increased 0.3%, marking the fourth straight month of rising apartment rents in the Mile High City; rents rose 1.2% overall in the first quarter of 2024. The positive rent growth is tied to a rebound in demand. Net absorption amounted to 2,250 units in Q1 2024, the highest figure dating back to Q2 2022. The average apartment rent in Denver is now $1,849 per month, up from $1,823 per month at the start of 2024.

Demand for Mid-Priced Apartments Helps Stabilize Multifamily Market

Demand for mid-priced apartments rebounded in 2023 as rising consumer confidence, lower inflation, strong wage growth and waning recession fears allowed renters in cheaper apartments. Results from the first quarter of 2024 show a solid 19,000 units of three-star demand, the highest quarterly total in three years. The overall absorption for 2024 stands at 410,000 units, with three-star units expected to account for almost 25% of that total. While that doesn't seem significant, it’s essential on an absolute basis because three-star units account for the most significant amount of multifamily inventory, with 7.7 million units of the 19 million total units, which means three-star apartments have an outsize impact on the trend of the overall multifamily market. Pent up demand for middle-tier apartments is driving rent growth in the Denver market; easing inflation and improved consumer sentiment have made potential new renters at this price point more confident in signing a lease. The average asking rent for a three-start apartment in Denver is now $1,656 per month after rising by 1.5% in the past year.



Sources: CoStar News

Multifamily Investment Falls to Four-Year Low

Total multifamily investments in the first quarter of 2024, fell to below $19.8 billion, the smallest quarterly total since the pandemic-slowed second quarter of 2020. Investment in the past quarter represented a 28% decline from Q4 2023, and a nearly 88% drop from peaks in the fourth quarter of 2021. Declines in investments, reflected in the first-quarter earnings of some of the nation’s largest apartment owners, come as buyers and sellers find it difficult to agree on pricing.

Denver’s multifamily market has reemerged as a top investor target with $940 million trading in the first quarter of 2024, ranking the Mile High City third in the nation for investment volume. The metro area added nearly 19,000 people last year, making 2023 the strongest year for population growth since the onset of the pandemic. In total, 46 properties traded in the first quarter, including two that sold with a sale price above $100 million. While Denver outperformed relative to other markets in Q1 2024, sales volume still represents a drop of about 30% compared to the market’s pre-pandemic, five-year quarterly average.

Sources: CoStar News

Multifamily: Fort Collins / Loveland / Larimer County

Sources: CoStar

Multifamily: Greeley / Weld County

Sources: CoStar

Cost of Capital Keeps Investors on the Sidelines

While three-star properties remain supreme, the high-end four- and five-star properties have struggled to generate positive rent growth across the U.S. and in the Denver market. While these properties at the top end of the market consistently account for the bulk of net absorption, oversupply conditions continue to weigh on landlords’ ability to push rates. Continued high levels of demand will be needed to support further rent gains in 2024. In the Denver market, over 8,000 units are scheduled for completion through the remainder of 2024 on top of the 3,600 units that were added in Q1. New units added to the market are expected to keep the vacancy rates above 9%, the highest vacancy recorded in more than 20 years.

Investors have pulled back across the nation in the past year in response to the increased cost of capital. The multifamily construction boom is compounding broader economic challenges as the flood of new units added across the country weakens rent growth, making deals less attractive. While the apartment building boom is winding down, the cautious wait-and-see approach that is weighing down investment volume will likely persist while inflation rates remain high. Increases in capitalization rates have also accelerated, translating into lower property values. These measures of investment yield signal risk, with high rates indicating a weaker prospect of returns. Cap rates in Q1 2024 reached 5.7%, a 20-basis point increase from Q4 2023 and 100 basis points higher than the most recent low in the second quarter of 2022 when the Federal Reserve began raising interest rates.

Source: CoStar News

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