August 25, 2013
Houses are being built in the Pikes Peak region at their fastest pace in seven years. Home prices and sales have been rising for more than a year. Long-term mortgage rates - while ticking up in recent weeks - remain attractive at under 4.5 percent. - So if a housing recovery is in full swing, why is apartment construction at a 10-year high in the Colorado Springs area, with several more projects proposed or on the drawing board?
Because times have changed - and so have demographics, said members of the real estate community and multi-family housing industry. Home ownership might have been the American Dream for many generations, but not everybody wants to live in a house these days.
"Notwithstanding that certain sectors of the housing market are growing again, there is a whole contingent of people, young people particularly, who are not anxious to take on mortgages and set down more permanent roots," said Steve Sharkey, a vice president with Nor'wood Development Group in Colorado Springs, which has built one apartment complex in Fountain and is developing four others in the Springs.
Demand for apartments drove the Springs-area vacancy rate to a 12-year low of 5.4 percent in the second quarter, and sent average rents soaring to a record high of $807 during the same period, a 4 percent year-over-year increase according to the Colorado Division of Housing.
Apartment projects currently under construction will add about 800 units in the Springs area this year and a similar number in 2014, said Cary Bruteig, a principal with Apartment Appraisers & Consultants in Denver who tracks the Springs market.
The number of apartments being added this year and next would be the most since 2003, when 1,750 units were completed and opened in the Springs area, Bruteig said. Another 3,000 units have been proposed or are in the planning stages, he added.
Even as the number of apartments being added locally this year will be at its highest point in a decade, the increase follows several years of little, if any, multi-family construction in the Pikes Peak region. In 2008 and 2010, for example, no new apartments came on line in the Springs area, Bruteig said.
As the apartment market has cycled up and down over the last three decades, there have been an average of about 700 units added each year in the Pikes Peak region - although some years during that span saw as many as 2,250 apartments completed, he said.
By comparison, about 15,000 apartments are under construction in the Denver area, and another 20,000 units are in various stages of planning, he said. And while local rents have hit a record high, the pace at which they've increased is slower than in Denver, Bruteig said. Denver rents averaged $1,022 a month in the second quarter, a 4.4 percent increase from a year earlier, according to the Housing Division.
Developers have recognized the stepped-up demand for apartment living that's taking place in Colorado Springs. With that demand comes higher rents, which mean developers see an opportunity to recover their investments and turn a profit - especially if they can sell their properties later to institutional investors.
Nor'wood has been arguably the city's most successful real estate company over the last 30 years; its residential and commercial projects include the First & Main Town Center retail complex, the Plaza of the Rockies south office tower, the Powers Autopark and the Nor'wood and Wolf Ranch master-planned communities.
In the last two years, Nor'wood also has jumped into apartment development. It built the 240-unit Mesa Ridge Apartments, which opened earlier this year in Fountain; Nor'wood also is partnering with California-based Western National Group to develop four projects in different parts of the Springs that would add about 1,100 units over the next two years.
Nor'wood's decision to add apartments to its development portfolio was based on internal and external market research, Sharkey said.
Many young people and young professionals - unlike their parents and grandparents - aren't interested in settling down; they want to be ready to seize job opportunities when they come along, which means not being tied to a house and mortgage, Sharkey said.
Some of those same younger people saw their parents lose their homes as a result of waves of layoffs and foreclosures that accompanied the 2007 recession - another reason they don't want to buy at this time, Sharkey said.
More young people also are waiting longer to get married and have children, Bruteig said.
"Getting married and having a kid is what initiates people to go out and buy a home, or that's one of the major reasons," he said. "Since those are occurring later in life now, people are therefore renting longer in life."
As a sign of the shifting demographics, a U.S. Census Bureau report last month showed the percentage of Americans owning homes had fallen to 65 percent in the second quarter of this year, the lowest second-quarter rate since 64.7 percent in 1995. The home ownership rate had been as high as 69.2 percent in the second quarter of 2004
Meanwhile, borrowing requirements still are tight enough that some people can't qualify to buy a home, unlike before 2007, when many homebuyers didn't have to put money down and could borrow with iffy credit scores, Bruteig said.
Also, many young people carry a huge student loan debt after college. The average loan payment is more than $300 a month, which also prevents some younger people from qualifying to buy a home, Bruteig said.
Some younger people who couldn't find jobs during the recession lived with their parents, said Gary Winegar, chief investment officer for Griffis/Blessing Inc., which manages more than 4,000 apartments along the Front Range, including Nor'wood's Mesa Ridge Apartments.
Now that the jobs picture is better, those young people are moving out of their parents' basements, but only want to live in apartments so that they can stay mobile, Winegar said.
But younger people aren't the only ones having an effect on the multi-family market, the experts said.
Many older renters simply want a maintenance-free lifestyle that comes with apartments, Sharkey said. Some baby boomers, meanwhile, rent apartments to be near their grandkids, Winegar said.
In response to the demand for apartments, developers are looking to add newer types of amenities to cater to Generations X, Y and other renters, Sharkey said.
Some of Nor'wood's projects will have exercise areas for pets, outdoor barbecues, clubhouses with Wi-Fi and big-screen theaters and business and fitness centers, among other features. Many renters want a Starbucks-like environment in the clubhouse - the ability to work on laptops and tablets or engage with other residents, Sharkey said.
"People are often wanting to do something other than being holed up in their apartment," he said.
Although demand for rentals is helping to drive the market, some developers are more interested in selling their projects for a profit once they're up and running and occupied, said Doug Carter, a Springs-based commercial broker with national real estate firm Sperry Van Ness.
Institutional investors - such as insurance companies, real estate investment trusts and private partnerships - are looking for places to put their money and have shown a big appetite to purchase multi-family properties, Carter said.
"The classic business plan of the developer is to build it as quick as you can, collect the fees (rents) and sell it as quick as you can," Carter said of multi-family developers, which he added makes them no different than home builders who sell houses or office park developers looking to flip their projects.
Sharkey, however, said Nor'wood and Western have no plans to sell their Springs-area projects.
Despite the flurry of apartment activity, the area isn't in danger of being overbuilt, the experts said.
Even though 3,000 units are in the planning stage, history shows not every project that's announced or even submitted to local government planners winds up getting built, Bruteig said.
Ultimately, lenders decide if a project goes forward; if market conditions change and developers lose their financing or don't secure it to begin with, their projects will sit on the shelf, the experts said. Rising interest rates or increasing prices for building materials also could hike developer costs and force some projects to be scrapped, they said.
And while the Springs has seen an improving employment picture, the area isn't adding enough jobs to send the demand for apartments skyrocketing, Winegar said.
"Right now, things do seem to be balanced," Winegar said of the supply of apartments versus demand. "But going forward, I just think that developers will have to be careful. The ones that want to come in after the properties are being built now, they're going to have to look at it (the market) to see where things are going. And we've got to see some evidence of better job growth in Colorado Springs in particular for developers going forward."
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