Apartment landlords facing the financial fallout from too much supply

Metro Denver s apartment area after years of robust construction has swung solidly in favor of renters and that is putting developers and building owners and the lenders who fund them under increasing pressure Median apartment rents over the past year through August are down more than in Denver in Thornton about in Aurora and Northglenn and nearly in Glendale according to the apartment search engine Apartment List Denver has the sixth weakest region for apartment rent appreciation among major U S cities and has a vacancy rate that was approaching in August which is well above the to vacancy rate range considered a balanced sphere according to Apartment List I would say my sort of one-sentence summary of Denver multifamily is that it s just arduous No one wants to do anything right now disclosed Aimee Love a principal with Essex Financial Group a boutique commercial debt placement firm based in Denver who spoke on a panel at IMN s Mountain States Middle-Market Multifamily conference in Denver last week Love stated she has around a half dozen construction loan requests sitting on her desk certain ready to go for the past two years But the projects can t find willing backers Lenders who are still evolving often will lend only around half of a project s value requiring developers to put in a large amount of equity The projects remain stuck on the drawing board unable to move forward Right now that could be a saving grace in that the realm has more supply than it can handle In the years since the pandemic apartment construction in metro Denver has greatly outstripped the region s historical average of about units a year with about apartments added in and last year according to the Apartment Association of Metro Denver While not as bad as the office sector which is struggling with an delinquency rate nationally borrowers in multifamily are finding it harder to stay current on their payments Delinquencies on multifamily mortgage-backed securities surged basis points in August to reach a -year high according to Trepp a records analytics firm About billion in multifamily debt is coming due between and and it will need to be refinanced in a field that has a greatly diminished appetite according to a review from Newmark You can t get a loan that works on construction You can t refinance out of an existing deal disclosed J C Clemens Jr chief production officer with Flagship Capital Partners in Houston a firm known for being willing to invest when others won t Developers typically take out a short-term or bridge loan during construction which they roll over into a longer-term mortgage at a much lower interest rate once a building is complete and takes on tenants More and more of them are having to do what are called bridge-to-bridge loans which used to carry a stigma but have now become a necessity Capital providers will fund the short-term loans which carry interest rates of to but they represent a patch rather than a viable long-term method And they add to the overall costs Financing is even more demanding when it comes to purchasing older buildings and refurbishing them Unable to compete with all the shiny new luxury developments older urban buildings in places like Capitol Hill are struggling with higher vacancy rates and have become untouchable to traditional lenders I would say it s a story of the haves and the have-nots The extremely well-located newer vintage assets are receiving a lot of interest but the not-so-well-located older vintage assets there s almost no activity explained Craig Kalman capital director with RedPeak a Denver-based owner of apartments spread across buildings in the metro area That s a issue for RedPeak which historically has targeted older buildings in central Denver Rents on its new leases are down about on average Kalman commented The firm has shifted more of its purchasing focus to newer apartment buildings in the western suburbs where operating costs are lower and less assets is needed in upkeep I do think in the next year maybe maybe nine to months there could be a generational buying opportunity in central Denver he noted But for now RedPeak is looking elsewhere Clemens reported his company focuses on deals in the million to million range which in more normal times should be easy to find in the Mountain states But lenders have stopped playing ball and sellers aren t willing to acknowledge their predicament It is a challenging story Clemens declared Sellers expectations are not quite meeting buyers desires Oversupplied multifamily markets like Denver might be at an impasse but that could change next year as values drop low enough to draw in venture dollars High home prices and high mortgage rates continue to price plenty of foreseen homebuyers out of the arena leaving them as renters That provides a solid base of promotion to the area That s different than in the office arena where demand vanished when companies shifted to remote work arrangements Far fewer multifamily permits are getting pulled which over time should bring the realm back into balance provided demand holds up which it should barring a recession or outmigration Through the first half of the year billion worth of apartments changed hands up about from the same period last year but less than half the volume of billion in transactions that occurred in the first half of according to Trepp Right now owners of multifamily properties are increasingly focused on trying to get their operating costs down although that has been hard to do given a surge in insurance premiums property taxes and wages It is an operationally-focused mindset right now reported Doug Elenowitz a co-founder and principal at Trailbreak Partners in Denver Related Articles Atlanta developer to build new residences in Arvada s Candelas society Feds say Tren de Aragua gang members among people charged in Colorado gun drug-trafficking cases The Denver Post takes top honors from Colorado Press Association including inaugural A-Mark Prize Downtown Westminster has slowly taken shape but soon will get an injection of life with park food hall Colorado law prohibits evictions over unpaid utilities Advocates say landlords do it anyway Chosen of the techniques property managers on another panel commented they were trying to cut costs are by installing leak detection systems to catch damage early bringing janitorial services in-house rather than relying on third-party vendors and working with insurers on vulnerability reduction strategies to reduce premium increases Tenant attraction strategies are also part of the mix and small things can give a maturation an advantage over its rivals Particular offerings include having a cafe on site with branded coffee or focusing on wellness amenities that go beyond offering an exercise room such as fitness classes and rotating massage therapists Savvy tenants know that the realm is in their favor Elenowitz announced and they have become adept at playing landlords off each other when it comes to the concessions match Given the long lag between planning a project and opening one Elonwitz stated Trailbreak is trying to get ahead of what it expects will be shortages and rising rents once the sector works through the excess supply It is hoping to land its new units in and just in time for an undersupplied sphere to gobble them up We are progressing right now he revealed We re very bullish on it from a timing standpoint Clemens revealed his firm is buying older and well-located properties or buying brand new higher-end buildings from developers who are being forced to get out for below replacement costs Clemens expects sales activity to pick up in the remainder of the year and predicts that to be an evolving one for deals as more distressed assets come up for sale Get more real estate and business news by signing up for our weekly newsletter On the Block