Class C Apartment Buildings Gaining Momentum in 2008
Since the foreclosure crisis, Denver has seen a much stronger apartment market in the metro area. Would-be homeowners are now renting apartments more often due to the subprime issues. Recent construction has been at a bottom low and Colorado job growth is higher than the national average. Even stock market cannot guarantee financial safety. Since the supply for apartment rentals is at an all time high, this could be why investors are moving away from commercial properties and towards apartments.
Class A and B apartment building typically have pools, fitness centers, business centers and so on. These apartment buildings have been enjoying low vacancy and increased rates since the economic downturn. Older apartment buildings have been seeing an increase in rentals in C class buildings. Class C buildings do not have any amenities that come along with them. This increase in Class C buildings has a considerable amount to do with the trickle-down effect. As people move out of Class A and B apartments they will fill in the previously empty spots in Class C buildings.
Class C apartment buildings are now more attractive to investors simply because of the sharp increase in rental rates for these buildings. The nicer and newer models of apartment buildings have seen rental increase upwards of 15 percent, but the older buildings have not seen much change. Now there are plenty of opportunities for investors to capitalize on the older class C buildings.
Some smaller, Class C owners that may have only one or two properties are not coming to terms with and taking advantage of this strong rental market simply because their rents have not risen in six or seven years. During that time period, many of them were scrambling just to pay the bills as vacancies were vast and tenant quality was in the gutter. It was as bad a time period as many had ever seen. In just the past six months, these owners have seen tenant quality improve and their buildings are now 100 percent occupied for the first time in years.
Some property owners are concerned that their buildings will have the same energy consuming issue that they have fought for years. This is where the real opportunity for investors comes into play when researching class C apartments that are under performing. This also causes a problem between the actual rent and market rent for these buildings.
Fundamentally, all the ingredients are on the table for an incredibly strong run for apartment owners. Net operating incomes are improving as rents continue to rise. Capitalization rates are increasing across the board. Partially due to difficulty in the lending market, apartment values have not improved much yet. Rest assured, as investor demand continues to build, prices will move north. Savvy investors will find massive opportunity and capitalize on the upcoming frenzy in the apartment market. There has rarely been a better time for investors to sell and exchange into a larger asset and/or acquire more apartment buildings before values rises.
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