Mountains face supply-and-demand imbalances

Eagle Nest Apartments
Eagles Nest Apartments, in Leadville, recently sold for $13.5 million.
Greg Price Vice president of investments and senior director, Marcus & Millichap

Greg Price
Vice president of investments and senior director, Marcus & Millichap

In the following question and answer, Greg Price, a Denver based Marcus & Millichap vice president of investments and senior director, answers questions about the multifamily property market in Colorado’s mountain resort communities with the firm’s public relations team.

Question: What are the characteristics that make the apartment market in Colorado’s mountain resort communities different than Denver’s market?

Answer: Colorado’s mountain resort communities and Denver are similar in that they both have encountered apartment inventories insufficient to meet still-rising rental demand in their areas. As a result, rents are rising tremendously. The difference between the two areas is that the supply-and-demand imbalance is much more amplified in mountain resort communities than in Denver.

Question: What are the economic drivers in Colorado’s mountain resort communities?

Answer: Tourism is the biggest economic driver. Peripheral economic drivers are industries supporting mountain resort tourism, such as retail and construction.

Question: How has employment and population changed in the high country region?

Answer: Summer tourism is booming in mountain resort communities and tourism during ski season continues to climb. Thriving year-round tourism is driving employment growth in the area as more hospitality, retail and construction workers are needed to accommodate the increasing needs of mountain resort goers. Essentially, rising tourism is producing a domino effect, which impacts all parts of the economy in these communities.

Question: How has this impacted multifamily operations?

Answer: There definitely is a lack of affordable housing and rental housing generally. Even if local residents can afford housing, they still may not be able to find a place to live. Supply is just that scarce.

As a result, multifamily rents and property values in mountain resort towns and the outlying towns are surging. One such example is in Leadville, where a growing number of resort workers from Vail Valley, over 40 minutes away, are moving to in droves.

Tight supply also has contributed to multifamily vacancy levels within a 60-mile radius of Leadville to compress to 2.2 percent year-over-year in 2015. Even now, during the summer months, vacancy continues to constrict. This is very unusual as the mountain resort communities normally experience vacancy, increasing between 10 and 20 percent, over summer.

Another factor worth noting is that condominium owners are taking advantage of the attractive rental market and leasing their units to tourists at a premium and not to long-term local residents. This is adding fuel to what many in the area consider to be a rental crisis.

Question: What is being done to address the issue of limited apartment supply for area workers?

Answer: Businesses and municipalities are considering a number of options to address the issue of limited apartment supply, but one problem they keep running into is finding places where they can build. If you look at Vail Valley, it’s relatively landlocked. If you then turn to Eagle County, development would have to be done down in the valley away from the town, which would produce a similar commute to those living in Leadville. Though there is a clear need for more living space and initiatives are being proposed, it still will be very challenging to get multifamily projects constructed.

Question: Can you elaborate on these challenges?

Answer: There are two key challenges, in my opinion. First, the landscape and geography presents a challenge with respect to the feasibility of new multifamily projects. Second, mountain communities, in many cases, are divided when it comes to approving new multifamily developments. Though folks understand the need for more multifamily housing to address the housing shortage, they still may resist a new development in their community specifically.

Question: You’ve mentioned Leadville, which is where you recently brokered the $13.5 million sale of the Eagles Nest Apartments, one of the largest apartment complexes in Colorado’s high country. Could you provide some background on this transaction and what was the significance of the sale?

Answer: What was interesting about the Eagles Nest Apartments transaction was that when we were beginning to market the asset there was a complete lack of interest from local investors, which may be due, in part, to a reputation in Leadville for lawlessness and economic hardships over its 130-plus-year history.

What was vital when marketing the property was educating potential investors, who were unfamiliar with the region’s multifamily market, about Leadville’s apartment inventory, the high demand from a growing population for multifamily rental units and little-to-no-foreseeable threat of new construction.

What was significant was the response from investors who were following the national news about the limited supply of rental properties in and around Colorado mountain resort towns. They understood the logic behind the property’s upside potential. As it was, the property started achieving higher rents while it was being marketed. We ended up with around 12 offers. Ultimately, we secured the buyer, a Japanese investor, via a broker in Marcus & Millichap’s Chicago office. The buyer recognized the upside potential very quickly and bought the property on what was essentially a pro forma basis.

Question: Does this transaction exemplify any trends you’ve observed with respect to multifamily properties in the area?

Answer: Transactions are few and far between in the high country, so it doesn’t exemplify a trend, per say. What it does demonstrate, however, is that if an apartment property listed for sale in a mountain resort community is marketed correctly, even in Leadville, it will attract substantial investor interest and generate multiple offers. It really highlights how mountain apartment properties can be strong multifamily investment vehicles.

Question: What is the outlook for multifamily properties in Colorado mountain resort communities with respect to supply and demand and construction?

Answer: On a supply level, the biggest issue that arises with new proposed developments is that construction costs can be 30 percent higher – or more – than in Denver. These higher costs are due to factors such as lower population density and fewer viable development locations. Another impediment to new construction is the shorter building season, which is the result of heavier winters.

The point is, the threat of new construction is minimal, if at all. Even if a few apartments are added to the inventory, the issue of insufficient supply will still likely persist for the foreseeable future.

Question: Would you say that because of these persisting issues rents and property prices will continue to rise?

Answer: Yes, I believe they will continue to rise. That said, it is important to keep in mind that the average apartment renter – say in Summit County, Vail Valley or Eagle County – could be priced out of the area if rents increase too much, too fast. Already we see some income levels being priced out. It’s a classic supply-and-demand issue.

Featured in the August 2016 issue of Multifamily Properties Quarterly.

Edited by the Colorado Real Estate Journal staff.