Out-of-state buyers show affinity for Colorado

infographic in-state vs. out-of-state buyers
All images courtesy Colliers International Multifamily Group
Craig Stack

Craig Stack Colliers Multifamily Group, Colliers International, Denver

Bill Morkes

Bill Morkes
Colliers Multifamily Group, Colliers International, Denver

Purchasing an apartment building in Colorado has proven to be challenging due to the growing number of buyers lining up to acquire a limited number of available properties. For certain assets, it is not uncommon to receive upward of 20 offers.

It’s not just local investors clamoring to purchase apartments; investors from outside Colorado represented 70 percent of purchases through August and 78 percent of purchases over the same period of 2014.

Using data from CoStar, we reviewed apartment sales through the end of August for 2014 and 2015. We looked at transactions of $10 million and larger in Denver, Colorado Springs and Fort Collins, and the analysis revealed where buyers are coming from. This article explains the ripple effect created by the increase in buyers from across the country for Colorado properties.

California investors lead the way. For the last two years, the award for the state with the most aggressive buyers goes to California, putting local investors in second place. Cap rates (rates of return on a buyer’s investment) tend to be lower in coastal markets and major Californian cities.

map of investor locations

Out-of-state buyers’ locations for purchases of $10 million or larger

Colorado is one of the preferred markets for California investors to deploy capital at slightly higher rates of return in, what many view, as a safe and growing market. The result of the increased competition from out-of-state buyers accustomed to buying and owning in lower cap rate environments leads to further competition and compressed cap rates (higher prices) in our local markets.

First-tier market status. Demand from out-of-state buyers for property in Colorado likely will continue to remain strong and increase. Denver, once considered a secondary market to gateway cities like San Francisco or New York, has upgraded to a primary market for many institutional investors and advisers. The term “institutional investors” often refers to pension funds, real estate investment trusts, insurance companies and large wealth advisers.

Primary markets are considered the safest and most attractive locations to invest in real estate across the country. As Denver’s population and economy continue to grow, this viewpoint of a tier-one market will become more widespread, paving the way for additional investment demand for our market. While Denver is experiencing historic low cap rates due to the limited opportunities and increasing demand, private and institutional investors have expanded their investment horizon outside of Denver to suburban and secondary markets, which increases prices across the state.

Secondary and tertiary markets gain momentum. Historically, smaller cities, often defined as secondary or tertiary markets, were the preferred opportunity for local investors or a small handful of opportunistic regional buyers who crafted a niche of investing in secondary markets to achieve better returns. In recent years, this trend of investing in secondary markets has exploded with buyers ranging from private capital to institutional buyers, all of whom are uncovering opportunities in these smaller markets. Recently several Class A communities sold to institutional investors in secondary markets such as Loveland and Fort Collins. In our recent experience, marketing a Class C building in a secondary market, we received 15 offers and nearly all were from new private capital buyers to the market. There used to be less competition for assets in smaller markets, but now often we have auction-like bidding for properties, which results in a significant improvement in pricing for sellers.

International investor locations

International investor locations

Optimistic outlook. While Denver may not be a top 10 metropolitan statistical area in the country in terms of population, it consistently ranks in the top five in regard to other metrics including employment and rent growth. These rankings are important as institutional investors seeking tier-one markets will look at these growth factors as insulation against risk. As some of the largest domestic institutional investors have already paved the way to Denver and Colorado, others will follow. While foreign capital typically invests in large coastal markets, we anticipate the next wave of investment in our market will be from overseas.

There has never been a more robust apartment market for owners and sellers. Interest rates remain low, rents are growing at record levels and, at the same time, investor demand to buy apartments is at an all-time high. This is an interesting and exciting time to be in the Colorado apartment market. While we might bemoan the fact that our daily commute takes longer and skiing on the weekend means we must leave earlier to beat the traffic, one investor remarked that these pains are the price of prosperity.

Edited by the Colorado Real Estate Journal staff.