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Every Friday, join us as we dive into the latest in real estate multifamily with David Moghavem, Head of East Coast Acquisitions at Trion Properties. David invites top experts who know the ins, outs, and trends shaping the real estate multifamily market across the nation!
Whether you’re a seasoned investor or just curious about where the next big opportunity might be, Deal Flow Friday brings you the weekly inside scoop on what’s hot, what’s not, and what to watch for in today’s ever-evolving real estate scene.
David Moghavem (00:19)
Hello everyone. Welcome to another episode of Deal Flow Friday. I'm your host David Mogavum and we got here Kevin McKenna, the Colorado Springs guru. If you've even dabbled in the Colorado Springs market, you know Kevin's name. He's been around for a long time. He's currently at CBRE Colorado team, but has been brokering for a long time. Kevin.
Let me give you a quick introduction and then we'll jump in. Kevin McKenna has over 20 years of experience as a broker focused on the Colorado Springs multifamily market. Kevin has sold over 15,000 apartment units in Colorado Springs throughout his career with a total consideration of over two billion. These transactions have spanned from 10 units over 300 units for a full spectrum of clients, including institutions, private partnerships, family offices.
and individuals, nonprofits, lenders, and special servicers. In addition, Kevin and his partner, Willie Holliday, have consistently achieved record-setting pricing. That's very true for every vintage of community. And I've sold three times the number of transactions than any other brokerage team in Colorado Springs. think that summarizes it well. Kevin, you're a wealth of knowledge. You're a huge asset and integral
part of us understanding the market and I'm excited for our audience to hear from you as well and get your take on the Springs. How's it going?
Kevin McKenna (01:50)
Good, good. Thanks for having me. I really appreciate it. Looking forward to diving in.
David Moghavem (01:55)
Perfect, perfect. So I guess we'll start it simple. Why Colorado Springs? Give us the 30,000 foot overview pitch on the market.
Kevin McKenna (02:04)
Yeah. Yeah. Again, for those who you don't know Colorado Springs very well, it's the second largest metro area in Colorado. You know, it's roughly 750,000 people as a metro area. You're roughly an hour south of Denver. You know, from a lot of standpoints that it's a market that has a lot of opportunity. First and foremost,
the population growth has exploded down there. It's gone from 500,000 people in 2000 to over 750,000 people here today. That's over 250,000 people. Over 90,000 people have moved there, or grown by 90,000 people over the last 10 years. And that growth is expected to continue.
Why are they moving there? Why are we growing like that? I think one is the quality of life there. We're consistently in the top two or three in the country as far as the quality of life goes. Number one city, for instance, in Colorado live in. Number three city in the entire nation. Number two city as far as college grads moving to. So there's a lot that goes into.
the quality of life you're setting up against the mountains. You go out to your apartment, you can get on your bike, you can go hiking in one of the best parks in the entire country. You're an hour and a half away from skiing and so forth. So lot of the reasons why people want to live in Colorado, they live in Colorado Springs. But part of that is just the lower cost of living here. Colorado is an expensive place. And if you want to live in Colorado along the front range, this is kind the lower cost alternative.
You know, rents and housing prices are 30 % higher in Denver. people moving to Colorado, one in four people are moving to Colorado Springs that are moving to Colorado. A lot of that has to do with that lower cost living down there. Two is another point is just the educated workforce. have over 42 % of our workforce has a college degree, one of the largest percentages in the entire nation.
We've got a great diverse economy down there. Our job growth is two and a half percent higher than Colorado, higher than Denver even over the last 12 months. Much more diversified workforce than we've had in the past. And really it's a business friendly environment. think more and more a lot of people are looking for, especially investors are looking for kind of more politically
fruitful environment, that they're not going to have a lot of regulation and so forth that some of these other blue cities have around the country. So that's been a big factor as well.
David Moghavem (04:43)
Yeah, there was a lot in there and that's all great points. I want to go back to the population growth and the quality of life. The way I see Colorado Springs, it's a value prop to why people move to Denver. It's the Denver life, but with half the cost. It's much more affordable. It's closer to the mountains. Is that right? It's a little bit closer. And it's
Kevin McKenna (05:02)
Exactly.
Yeah, exactly.
David Moghavem (05:11)
much more affordable, great quality of life, charming, lot of, you know, being by Broadmoor, it's a great vibe. It's a little bit of a slower pace. I've heard you're single in Denver, but then when you're married, you move to the Springs. Like that's what I've heard of. And it's great. I mean, I love it there. I always love going and touring properties there as well. One of the biggest drivers is definitely the
military and for Carson and Space Force. Can you talk about some of those drivers as well from the employment side?
Kevin McKenna (05:48)
Yeah. And the plenipotent side, I mean, it's much more diversified than it was 10, 15 years ago. I mean, obviously the military plays a factor there. And just for those that you don't know, there's roughly four larger military bases there. One is for Carson, the Army base. And they have Pearson Air Force Base and Schriever Air Force Base and also the US Air Force Academy. All of these bases have been here for
decades and decades, essentially since kind of the mid 1900s. So really stable bases. A lot of them are very different from each other. know, Peterson and Shreiver Air Force base are very highly technical bases that, you know, they're managing the GPS satellites around the country. And like you mentioned, the space new kind of wing of the military, you know, Army, Air Force, Navy, Marines is the Space Force. And this is kind of ground zero for that.
So, you know, all of the military with Peterson and Schriever, all these people that have been working in the space industry for a number of years are kind of spearheading this new industry there. Also, right around there is a lot of defense contractors that want to be sidecar to that. Northrop Grumman, Boeing, so forth. And just it's just kind of ground zero for an entirely new, exciting
arm of the military that's only going to get bigger and bigger as time goes on. Fort Carson Army Base, again, that's kind of the largest base here in Colorado Springs. It's actually the third largest employer in Colorado, period. So it's 25,000 troops. It's a massive area. They're doing combat practices, flying Apache helicopters and so forth. And the thing about these...
military bases is that from a renter standpoint, almost all of them are renters. They're not buying houses. They have these huge housing stipends that they can live off base on. there's housing on the base. If there is any period, there's a waiting list to get on base. So lot of these people are renters. They live near the base. They have big housing stipends and they're just a really fruitful kind of
environment for the renter pool down in these areas. And then the last one is the Air Force Academy, which is a big geographic area, but essentially it's a college and it's not, doesn't play a huge factor in the economy. But again, one of the best universities in the entire country. So that's the military side of things. And again, I think a lot of the people retire out of the military and move into the private sector.
David Moghavem (08:14)
Yeah.
Kevin McKenna (08:21)
And that's just been a huge feeding ground to, like I said, on this educated workforce. And a lot of employers are attracted to that. You know, lot of these people are either moving into the defense contracting, you know, side of things, aerospace, or the big push in Colorado Springs. They decided a number of years ago, would take advantage of the cybersecurity side of things. They've added the National Cybersecurity Center here in Colorado Springs.
Again, it's just been a very kind of dynamic and fruitful kind of feeding ground for jobs here in Colorado Springs over the last couple of decades.
David Moghavem (08:59)
Yeah, and I would add the way that Colorado Springs has diversified its employment base from just military to defense to space to cybersecurity. It's almost cultural at this point, right? And you hear military bases and you think of some of these military bases that have shut down and come back up and depending on defense spending. Fort Carson is there to stay. It's been there for decades.
It's not moving and it's grown into, you know, the culture of Colorado Springs. And the military residents that you said with these stipends, they're incredible tenants. They keep the properties clean. They pay on time. If there's one late payer, you can call, you know, one of their higher ups. They'll pay right away. Like they're incredible tenants to have, very respectable. And it's a great
market to operate in for that reason, right? You're seeing across the nation there's a huge wave of fraud and delinquency issues and you just don't see as much of that in the Springs from our experience anecdotally. Kevin, I want to pull up a map and give the viewers a little bit of a geographic overview. If they're looking at a map of the Springs, talk through
How would you separate and segregate the different sub markets within the springs and how do you understand it looking at it geographically?
Kevin McKenna (10:31)
Yeah, I mean, I think the city is kind of divided into from East West with I-25 that kind of splits right down the middle. The city is essentially growing East and North. You really, you butt against the mountains on the West. And then the South, you kind of go into Fort Carson, like I said, it's a big military, just a big geographic area. So really the city's kind of growing East and North.
So more or less you can kind of triangulate it in four pieces, or four pieces, know, south, east and west. And each of those have a different story to it, different nuance, different demand drivers, different employers. So happy to dive into as much detail on those as you want.
David Moghavem (11:12)
Mm-hmm.
Sure, I would love to talk a little bit about North and East. mean, Briargate, I love to hear your pitch, really nice, good demos, strong median incomes in schools. But yeah, what's your take on Briargate?
Kevin McKenna (11:43)
Yeah, I mean, I think the northern kind of Briargate area is like you said, they're going to have kind of higher incomes, really good schools, a lot of kind of more blue chip employers up in that area, kind of more white collar jobs. Again, a lot of growth up there. There is more supply. That's as you can imagine, that's where most of the new construction has in this last cycle started. You're going to get
You know, of your class A kind of multifamily stock is in that part of town. You're not going to have just because the city's grown up there, you're not going to have a lot of kind of B and C class assets. But, you know, again, west of I-25 on the north side is Air Force Academy. So that whole entire west side is essentially unbuildable. And then on the on the very north end of that
David Moghavem (12:37)
Mm-hmm.
Kevin McKenna (12:41)
sub market too is, is monument. kind of go outside of the county and grow into monument and water is really expensive up there. So there's kind of a natural barrier kind of on the very north end of the metro area, but definitely a really desirable north part of town. you, there's some people that live, you know, there and one spouse commutes up to Denver. mean, the very north end of Colorado Springs and then south end of Denver is 45 minutes.
So there's some of that going on. But again, you know, most of the people are going to be living in there in that and working in that sub market. So there's a lot to like great retail new, you know, Ford Amphitheater kind of concert venue that went up there. So there's just a lot of really good demos and great growth up in that part of town.
David Moghavem (13:33)
And then moving a little bit more south, I guess, let's talk a little bit about East Colorado Springs and some of the development going on there and downtown.
Kevin McKenna (13:46)
Yeah, I mean, East Colorado Springs, that's where all the, you know, the city is kind of growing straight over the top of the east side of town and Powers Boulevard kind of is really the main thoroughfare on the east side of town there. And again, you're not going to have necessarily some of the higher incomes that you'll see on the north end, but a lot of opportunities down there in that southeast part of town is really what we call the aviation corridor. That's where
the Peterson Air Force bases, that's where Shrever Air Force bases, that's where the airport is. There's like 50,000 jobs down in that southeast part of town that has a really good dynamic kind of story to it. From the multifamily side, it's been under supplied for a number of years. So mostly the stock is made up of kind of 70s and 80s. They really didn't build anything from like early 2000s until
five, six years ago. So there is some new supply coming in that area. But, you know, again, that's kind of ground zero where all these defense contractors want to be next to the military bases there. You've got the second busiest airport in the city or in the state there. And also just a ton of distribution, as you can imagine, around an airport of, you know, Amazon just built a four million square foot building right to the south of the airport. So.
I like that sub market. not going to have as many kind of, you know, higher rents than you would some other areas, but you do have the jobs. And I think it's kind of going to be a really interesting growth area for the Springs moving forward. And again, the city can only grow, you know, to the east so far. There's a big Banning Lewis Ranch, which just kind of bookends the east side of town. So, you know, they're
It's not like you can kind of grow to the east indefinitely. So most of it is kind of stopping at Marks Shuffle, which is just right east of Powers Boulevard. And that's really kind of your, fastest growing area as far as rooftops go in the entire metro area.
David Moghavem (15:57)
Nice. And then let's talk a little bit about South Colorado Springs, Broadmoor, Cheyenne Boulevard, that area.
Kevin McKenna (16:07)
Yeah. I mean, I people love being living in the West side of town. And when I say West side, it's kind of essentially kind of east or west of I-25. This Southwest part of town is really kind of bookended by the Broadmoor Hotel, which is really the nicest resort in Colorado. But really high end incomes, high end million dollar homes in that part of town, very difficult to build in that area.
You know, it's, it's, I think only one project's really been built in that area in over 20 years. So if you can get some, your hands on some product in that area, you, you know, you're going to do really well and you don't have the, the, you know, supply kind of concerns that you would in other areas of town. Neighbors are very difficult to build new construction. So a great area of town, you know,
As I said, Fort Carson is just very south of that. So you're going to have heavier military concentrations on that part of town, just given its proximity to Fort Carson Army Base. Most of those will, you know, the closer you are to the Army Base, the higher your percentage of military that you'll have there. But again, really stable, great, you know, access. You're literally like right on the mountain. So you've got state parks and
Broadmoor Hotel and the Australian Mountain Zoo and lots of amenities that you can take advantage of. And you're essentially just right south of downtown. So you can be downtown in less than five minutes.
David Moghavem (17:48)
Great. Kevin, so I guess let's talk cap rates a bit. How are you BOVing new construction versus value add deals across some of these different sub markets that we were just discussing?
Kevin McKenna (18:02)
Yeah, it's an interesting time in the market. We as a market, typically kind of during the peak, where the cap rates between Denver and Colorado Springs were essentially awash. Those have gapped out right as of right now. And I think that spells a ton of opportunity for buyers looking to get in in the Springs.
I think that's gapped out. We've had some, few transactions that it's hard to necessarily pinpoint exactly where the market is. mean, for instance, we were doing a billion dollars a year and multifamily transactions and that's gone down to like 200 or so million dollars a year. but our best estimate is it's, it's at least 25 bits. It's potentially even more like 50 bits. So that's gapped out. And once,
David Moghavem (18:48)
from Denver, just to clarify, right? Yeah.
Kevin McKenna (18:48)
really, yes, Denver,
exactly. And I think once we start getting some really meaningful rent growth at which we can talk about the supply in a bit, that's going to shrink back down. I think, you know, in general, you know, the class A space is in the kind of five and a quarter to five and a half cap range. And the B space is kind of high fives to low sixes and then C space is somewhere in the sixes. So
Again, similar story that Class A and Class C space, those cap rates during the peak were very tight and those have kind of gapped out. Again, I think it spells an opportunity for buyers in that kind of value add Class B space that the buyer pool right now is not huge. And I think that cap rates have spread out unnecessarily wide.
to new construction. So I think those cap rates are going to compress back in once that market kind of gets back. So yeah, I think in general, cap rates are following where interest rates go. And those have been some pretty wild swings over the last 24 months, but that's kind of where we are today.
David Moghavem (19:59)
Yeah, I mean, it is important to always when you're talking yields in Colorado Springs to bring Denver in the conversation and talk about, where's Denver trading? Where's the Springs trading? And I think it is important to note during the Zerp era that when rates were really low, there was no spread between Denver and Colorado and things got...
pretty expensive overall. But now with cap rates widening and they have widened, I would even argue it's maybe even more than 50, Springs has had, is an incredible opportunity to buy. Cause you get that yield where people may not be chasing yield today, but they're going to be chasing yield once some of the institutional type of assets start, the cap rates start to compress. And so I think Springs is a great play while operationally very landlord friendly.
great quality of life, low delinquency. Meanwhile, in Denver, in some of the assets we own, you're seeing an uptick in delinquency. You're seeing it being harder to be a landlord and to evict. So the fact that you can operate better and a little bit easier in the Springs, especially in some of these like South Colorado Springs markets where everyone's paying and there's low delinquency and still get a spread.
to what a same product would be in Denver, I think that's a great value prop for sure.
Kevin McKenna (21:21)
Definitely. Yeah, no, I agree. And, you know, I think the buyer pool is, you know, for suburban product is, I'd say eight out of 10 buyers in suburban Denver buy in Colorado Springs. So it's a very liquid market. mean, the true, true institutional buyers don't buy down there like the equities of the world and so forth. But, you know, again, really a liquid market. And I agree that these cap rates and this yield spread is
I think we're at the bottom really frankly right now, and it's only going to go up from here. I mean, we're selling class A deals for right around $300 a door where we're selling 80s products for that price point back during the peak. And a lot of this product was selling, this class A product, suburban product was in the $400 a door during the peak. I think people see that opportunity right now.
David Moghavem (22:06)
Right.
Kevin McKenna (22:17)
And we do have some supply that we are working through right now, a lot similar to Denver. A lot of Western markets have gone through it. And I think we're at the inflection point in the market right now is like, yes, we've had record deliveries here in 2021, but we've had record absorption. It just hasn't outpaced the deliveries. that script completely flips next year.
Our deliveries are going to be cut in half next year and the following year. And we're going to be returning to meaningful rent growth next year. So a lot of buyers are kind of like, well, you know, I'm waiting for positive rent growth and meaningful rent growth before I get in. And I'm just like, you know, it's going to be too late. once that happens, cap rates are going to that spread that we talked about that's whatever 50 bits above downright is going to become 25 or even less. So.
Again, I think we've had some much needed supply in the market and that's been all over the place from downtown, the suburbs and so forth. And frankly, we needed that supply and it shows because we've had record absorption in the last 12 months. But next year, like I said, it completely changes and deliveries are falling off a cliff. Buyers or developers can't find equity to
David Moghavem (23:21)
Mm-hmm.
Kevin McKenna (23:37)
make sites pencil and that supply pipeline shut off while demand is going to continue and only increase. And we're going to get back to those three, four or 5 % rent growth that we've seen. mean, rents rose over 20 % over the last five years and that very well could happen again here going forward in the next five years.
David Moghavem (24:00)
Definitely. I think when you're looking at the supply story of Colorado Springs and you said it best where it really does feel like we're at the bottom and you see it in some of the stats about 85 to 90 % economic occupancy and high supply. But then you look at the forward outlook and you're seeing that A, absorption has also doubled from what it was. It's record, record breaking absorption numbers. And B, you're seeing supply fall off a cliff. And so
High supply is one side of the story, but if you're also seeing record level absorption, you know that the supply was much needed and it was justified and that this is a blip. And just as you said, it's the bottom and it's a cyclical market. And I think you're going to start to see the uptick of that heading into 2025 and 2026 as supply has stopped, but demand is still there.
Kevin McKenna (24:51)
Yeah. And I think one thing we haven't touched on is just that rent to own discount that we see. I Colorado is a very expensive housing market. I mean, the rent to own discount in Colorado Springs is over 50%. So you're saving your renter saving over, $20,000 a year by renting versus owning. And in Colorado, again, this is not a Colorado Springs thing, in Colorado in general,
We're not building entry level housing. We're not building any condos because essentially there's construction defect litigation in place where if you're building condos, there's a hundred percent chance you're going to get sued for defect. No, that's a Colorado thing. So basically the last 25 years, no one has built any condos. So again, that entry level housing that's going to be your competition is non-existing out here.
David Moghavem (25:28)
Is that specific in the springs or is that just... Okay.
Kevin McKenna (25:44)
You know, these builders are building, you know, single family homes that are, you know, four or $500,000. They're not building a $200,000, you know, $300,000 condo. So again, that, that there's just not many options for these people to buy out here. And it only makes it more desirable to rent going forward.
David Moghavem (26:05)
Yeah. And it also goes back to the employers that they are essentially renters, whether in military or defense or some, or cybersecurity. so there's a demand for, for renters. I would say, you know, we're going back to the yields a bit. You were talking about how there's a lot of supply and some of that is being, is trading at call it a five, correct me if I'm wrong, five, five and a quarter, something like that.
and then value add maybe call it 90s 80s in the mid to high fives and value add maybe out of six or so. If you had to kind of place a bet on what would be a good buying opportunity in the springs, what would you say? Do you think it's more of this lower yield newer stuff or some of the higher yielding older stuff? Where would you place your bet?
Kevin McKenna (26:58)
Well, I see opportunity everywhere. I do like the class A space, just the basis play of getting in. But I think the opportunity is in this kind of B and C class value add space, in my opinion. Just because the buying pool has been a little bit on their heels, the capital has been much easier.
and to raise for the new construction. think it's just risk off for a lot of buyers and just like, Hey, I'm going to the safe brand new stuff. And that's why this cap rate spread is gapped out between kind of the class a and class B spaces. This, this cap, this, this buyer pool for this class B space value, ad space, is going to come back and it's just a matter of when. And I think this is the buying opportunity to take down that stuff.
the demand is there. The value add programs where you go in and renovate your materials and get rent bumps will be there. But you're also buying at a kind of above market kind of historical cap rate spread right now. So I think I like that space. I like you're not going to have as much competition on the buy side. And it's just a matter time before that really comes back.
David Moghavem (28:16)
Yep. Yep. I definitely agree with that. think some of the, I guess, eighties, nineties, early two thousands is starting to look really good right now in the Springs. Some of the newer construction agreed also would be a good basis play, but the yield can be a little bit tough to stomach today. I think it is going to be a great play down the line regardless. As you said, we're in the bottom. So some of these, all these deals are going to look good one way or another.
But I do think some of that value add, lighter value add, but still relatively good quality housing. There's still a really big demand for that. And there's still a little bit of a gap in renter, chunk rent, than some of the newer stuff, even with the concessions. So I do think that value adds going to come back to and be a little bit even bigger, stronger ROI than some of what it's looking like today on paper.
Kevin McKenna (29:10)
Yeah. And I think in the debt environment down there, you can borrow, you know, essentially the same debt as you can Denver. and in the value add spaces, I mean, you're positive leverage day one. I mean, you're not some of these tire markets, class a space and so forth. You're, negative leverage day one in this value add space right now, as it sits today, you're, you're, you know, you're, you're positive right out the gate while these groups are putting, you know, full term interest only and good leverage.
So that the debt is there and like you said, I think it's a good opportunity to get yield right out of the gate, even without the value.
David Moghavem (29:46)
Yeah, to get
to get mission financing, positive leverage day one, you'll get mission financing on some of the older stuff. And in a market where you're having low delinquency, people are paying, the fundamentals are good, the growth stories there, the growth trajectories there, I think you're in a good position in the Springs. I mean, still bullish on Denver, but
you have to pay, you're probably paying negative leverage going in for the same type of product. And you are facing a little bit of regulatory issues and political risk that you don't necessarily get as much in the spring. I do definitely see it, and a little bit less of a growth trajectory than what the springs usually has. So higher yield, positive leverage day one.
cash flowing asset that stands on its own two feet, that let's say things don't recover, at least you're still cash flowing.
Kevin McKenna (30:42)
Yeah, exactly.
David Moghavem (30:44)
Kevin, what's maybe one of the biggest mistakes that new investors make when entering the Springs market?
Kevin McKenna (30:50)
That's a good question. Yeah, I mean, I think management is one thing that, you know, this is a hands-on business and I think finding the right kind of team to manage their assets, I think is tougher and they've made some mistakes. Some people just kind of stumbled in that regard. So we try to help them out, put them in the right touch with the right groups and so forth. The management side, as you know, it's...
families of management intensive business. that's, I'd say one thing. I think that a lot of these older assets have had some capital needs that they've probably underestimated. Some of this 70s product and so forth that was super frothy that I think now that they're
taking care of some deferred maintenance that's eating up their cashflow, I think is something that they've been struggling with over last 24 months or so. But yeah, I don't know if that's necessarily a Colorado Springs problem either. But I'd say those are the two that come to mind.
David Moghavem (31:54)
Yeah, I would say maybe this might not be an exact answer to the question of investors coming in, but maybe like a misconception that I have come to learn about the Springs is in the beginning, you hear military and you say, okay, I don't want it to be military concentrated. But as we spoke in the beginning of the call, it's so diverse, the employment base, and it's grown into defense and it's a permanent employer and an employer.
permanent driver and there's so many benefits to some of the military components of stipends and low delinquency and good quality tenants that it really is an asset rather than a liability as a landlord. So I think that's like one of the biggest misconceptions at least for a prospective investor is that component of it for sure.
Kevin McKenna (32:46)
Yeah, no, I agree. I agree. I think once you kind of walk through it with investors, they kind of see the opportunity rather than an obstacle. And it's a plus for them, especially for the renter pool. So yeah, I agree.
David Moghavem (32:59)
Mm-hmm. So yeah, mean, it's December of 2024. I know everyone's starting to gear up for NMHC end of January. What's your overall expectation of NMHC? What are you expecting the sentiment's gonna be heading into the conference?
Kevin McKenna (33:19)
just in general for the whole like multifamily market or Colorado Springs or what.
David Moghavem (33:24)
I guess more multifamily market. You think it's going to be optimistic, pessimistic, cautiously optimistic. What's your thoughts going into it?
Kevin McKenna (33:35)
Yeah, I mean, I think it's going to be cautiously optimistic. I mean, with rates running like they have at the last 60 day, 45, 60 days, that's taken a little enthusiasm out of kind of it starting quickly. I think it's going to be a busy year. think it personally, I think it's going to be more kind of backloaded, like summer kind of on.
especially kind of Colorado Springs and Colorado in general, it's just more of a seasonal market. And we're kind of, this is a slower time of year, in the winter months, I don't expect a lot of product coming out specifically in Colorado, Colorado in general. and I think nationally, think the capital is there. Like there's so much money to, to, to buy apartments, it's just a matter of like product.
I expect a pretty steady amount at AMHC, but I don't expect a huge push in the beginning of the year, is my take. That could change if rates dip. think if rates dip another 25 plus bips and we go sub four, that will 2x the amount of product that's going to be hitting the market at least. I think a lot of groups that we're talking to and the clients of ours are kind of
getting ready for next year and waiting for kind of being nimble and being ready to hit go. a lot of that has to do with, frankly, their operations and just getting the financials in a good spot. And then second is just that interest rate environment. So it's one of those markets that it's going to flip extremely fast.
But as of right now, like as it sits today, where the tenure is, I don't expect a huge deluge, but that could change dramatically over the next 30 days. I expect in general, most of the product that's been selling here in Colorado has been brand new construction. I think more of this
Like I said, this value ad space should be coming on the market again. I think that's probably more like summertime. But I think in the, in the near term, it's going to be mostly kind of merchant builders, you know, that are, putting product on the market. We're not seeing a lot of distress. We're not seeing people upside down developers, you know, in desperate situations. There's been a couple of those.
situations up in Denver that we've marketed and frankly, anytime you put a distress tag on anything, it gets bid up and it doesn't really turn into like a, frankly, a screaming deal. So a lot of capital has been waiting for that and I think there's too much chasing that. So it's like any distress deal gets just bid up and doesn't turn into that great of
David Moghavem (36:07)
Mm-hmm.
Totally.
Kevin McKenna (36:27)
you know, opportunity in my opinion.
David Moghavem (36:29)
Yeah,
I agree. mean, I think a lot of a lot of people were just paying for the story, right? There is so much capital that was earmarked for distressed and there really hasn't been much that's operationally distressed, especially in the Springs. Everyone's for the most part paying. Yes, you have some vacancy and some concessions, but it's not like a whole wave of operational distress. It's more cap stack driven and
There are so many options and so much capital out there to satisfy some of these cap stack distress needs that before it gets to selling and the ones that were sold in Denver, at least that were distressed that were marketed. There were very few far in between and they got bit up. They got bit up to the point that the yield on costs. It makes sense to just buy something without the story and you're at the same cap going in.
And your basis is the same basis going in to what the total basis would be after the expensive bridge loan, the interest reserves, the deferred maintenance. All of that adds up. You're at the same basis as if you were to buy the deal straight up, stabilized. So in 2023, we had a good example of that where we bought like a high five cap in Denver and it was about like 208 a door.
And then next door, there was a distress deal that I think you guys ended up selling that deal that was about 30 a door less, 30 or 40 a door less, but had a lot of deferred maintenance issues. You had to buy it with bridge debt. And our deal you bought with, you know, about 70 bips positive leverage day one, cash flowing, making distributions. It's a
way less return on headache, right? Like buying something that's just stabilizing can stand on its own two feet.
Kevin McKenna (38:24)
we were joking, we should put distressed on all of our OMS just on the front page.
David Moghavem (38:28)
Yeah, as a sponsor,
we should just run our deals to the ground so they get bit up. Yeah, so we'll see how I think with NMHC, cautiously optimistic is the sentiment, it sounds like from what I'm hearing. There is optimism out there, but we had that optimism last year and it was like a balloon that got popped, right?
Kevin McKenna (38:33)
Yeah, right. Right. Yeah.
Yeah.
David Moghavem (38:53)
And as the treasury sit today, they're, I the five years at like, it was at four, two, and then Powell just announced another 25 bit BIP cut, which was expected, but now treasuries ran up even more. I guess every time Powell cuts, treasuries go up. So we'll see how that goes. But I think once treasuries get in that mid 3 % range, at least the five year, that was a sweet spot where it kind of was in August.
August or September. Can't remember. think that's a sweet spot where the bid-ass spread will start to narrow a bit more.
Kevin McKenna (39:27)
Yeah. Yeah. So, I mean, I think this is going to be, you know, looking back five years, you know, in the future or looking, you know, five years from now, looking back today, everybody's going to be kicking themselves for not buying more deals is the bottom line and overthinking it. And I get it. You know, you need returns, you know, but staying
too focused on the next 12 months, you're going to miss out on a lot of opportunities. So I know it's easier said than done and I'm not a buyer, but that's just like, you know, some of these deals we're selling right now are going to be 50, 70, maybe even a hundred grand more a door in the next five to seven years. people are going to be, you know, the fundamentals are going to be there.
The demand is going to be there. Colorado is not going anywhere. This is the place that people want to live. That's not changing. So I think it's a great, great buying opportunity here in the next 12 months.
David Moghavem (40:28)
Yeah, and Kevin, you've seen it all, right? You've been, you've seen the springs go through its ebbs and flows, and you've seen its highs, you've seen its lows, and you're seeing it now. So when you're saying that, it speaks volumes, and we take it to heart as well. yeah, mean, Kevin, this has been super helpful and really interesting conversation. Thanks again for hopping on.
Kevin McKenna (40:31)
Yeah.
David Moghavem (40:52)
and looking forward to seeing you in Vegas and looking forward to hopefully getting some deals done in 2025 and beyond.
Kevin McKenna (40:59)
Yeah, well, thanks for the invitation. It's been great. And yeah, hopefully we'll see each other here soon.
David Moghavem (41:05)
Awesome. Thanks, Kevin.
Kevin McKenna (41:07)
Thanks.