HOME
Columbus Apartment Investment to Attract Yield-Seeking Buyers in 2011
White-collar employment expansion will boost top-tier apartment demand in Columbus early this year, while lagging blue-collar job gains will limit improvement among Class B/C properties until last 2011. The professional and business services and financial services sectors will create nearly 6,000 jobs, reclaiming half the positions lost during the recession. Additions at finance companies, including the Westerville office of Chase, are particularly encouraging, considering the financial services sector entered the recession early due to the credit crisis. While lower-tier conditions will not improve significantly until the second half, some areas, including Hilliard, will begin to recover sooner. Developers will break ground din 2011 on the Hollywood Casino in the Hilliard submarket, generating 3,500 construction jobs. When completed in 2012, the project will create 2,000 permanent positions, providing long-term demand for local apartment operators.
As cap rates compress in major metros during the first half of 2011, yield-seeking buyers will gravitate toward the relative safety of the Columbus apartment market to take advantage of initial returns that meet their investment goals. In addition to traditional sales, some buyers will target high-vacancy, value-add opportunities as prices for these assets dip to a market-clearing level. Healthy job growth and a slow-moving single-family housing market will enable owners to improve occupancy more quickly this year. Stabilized Class B/C properties, meanwhile, will trade in the mid-to-high 9 percent range. Out-of-state investors interested in these complexes will find opportunities in the Northeast and Southeast submarkets. Growing apartment demand and limited competition from new supply in these areas provide long-term revenue potential for owners.
2011 Market Outlook
• 2011 NAI Rank: 37, Down 6 Places. Below-average employment and rent growth pushed down Columbus six places in the NAI.
• Employment Forecast: Employers will increase payrolls by 15,000 positions this year, or 1.7 percent. In 2010, only 500 jobs were created.
• Construction Forecast: After nearly 900 apartments came online last year, development will slow to 785 units in 2011, expanding marketwide inventory by just .6 percent.
• Vacancy Forecast: Vacancy will decline 70 basis points this year to 8.3 percent on positive net absorption of more than 1,550 units. In 2010, vacancy fell 20 basis points.
• Rent Forecast: Marketwide asking rents will climb 1.8 percent in 2011 to $675 per month, and effective rents will spike 2.4 percent to $636 per month. Last year, asking and effective rents rose 0.6 percent and 1.3 percent, respectively.
• Investment Forecast: Distressed and REO listing will become available over the next several months as banks clear assets from their books. Lower per-door prices for these properties will interest investors with a penchant for improving operations and realizing upside potential.
Quoted Source: Marcus & Millichap 2011 Annual Report
ABOUT US
Major Development Projects Generate Jobs, Support Apartment Demand
Spurred by an economic recovery in the city core and marketwide job growth, apartment operations in Cincinnati will strengthen further in 2011. The first phase of the mixed-use Banks development, located between the Great American Ballpark and Paul Brown Stadium on the Ohio River, will open in the second quarter of this year, expanding rental inventory in the Downtown submarket by 3 percent. Nevertheless, igh-paying job growth in the area will outpace new supply. Metrowide, employers will add more than 5,600 positions in the professional and business services and education and health service sectors this year, boosting Class A demand near major employment centers. Operations at Class B/C complexes will also improve as employment gains rise in lower-paying industries. Development of the Broadway Commons Casino, for instance, will generate 2,100 constructions jobs during 2011 and 2,800 permanent positions by year end 2012. As a result, vacancy will retreat to a 10-year low in Cincinnati.
Apartment sales activity in the metro will increase this year as local investors leave the sidelines and out-of-state syndicates explore new opportunities. In the lower tiers, buyers will target older REP complexes with turnaround potential. Many of these properties were purchased by out-of-state investors at the height of the market and have since been foreclosed due to weakening operations and banks’ reluctance to refinance. Two investment strategies are emerging with these deals. Local buyers are purchasing at low per-door prices, addressing deferred maintenance issues and stabilizing the property for long-term revenue potential. Syndicates, however, are relisting assets shortly after building and occupancy conditions improve. Top-tier investment activity remains focus on t complexes in the Downtown and Blue Ash/Amberely submarkets due to their high barriers to entry and historically stable NOI’s. Cap rates for assets in premium locations currently average in the mid to high 66percent range and could compress further in institutions and REITs become active.
2011 Market Outlook
• 2011 NAI Rank: 33, Down 3 Places. Below-average job growth and high home affordability dropped Cincinnati three places in this year’s NAI.
• Employment Forecast: Approximately 13,200 jobs will be added to the work force this year, a 1.3 percent increase. In 2010, employers created 700 positions.
• Construction Forecast. Following the completion of 350 units last year, developers will deliver 700 apartments in 2011.
• Vacancy Forecast. Vacancy will tick down 60 basis points this year to 6.3 percent. In 2010, the average vacancy rate retreated 110 basis points.
• Rent Forecast. Asking rents will increase 1.9 percent during 2011 to $715 per month, and effective rents will climb 2.4 percent to $638 per month.
• Investment Forecast. Financing standards in Cincinnati remain slightly more stringent than in some other markets, creating opportunities for cash-heavy investors to purchase quality assets in a relatively stable metro without competing with highly leveraged buyers
Quoted Source: Marcus & Millichap 2011 Annual Report
FOR SALE
Cleveland Apartment Market Tightens on Strength of Class A Sector
During 2011, healthy hiring in the local professional and business services sector will drive Class A vacancies in Cleveland below those in lower-tier properties for the first time in nearly a decade. Last year, white-collar payrolls expanded at the fastest pace since 1999, and continued gains this year will fuel stronger Class A leasing activity. This trend will help top-tier owners regain control over rents, especially in upscale areas like the Beachwood and Strongsville/Berea submarkets, where vacancies will settle below 3 percent in 2011. The recovery of Class B/C operations will continue to lag until lower-paying industries post several consecutive quarters of sustainable growth and unemployment levels retract. Close-in areas, including the East Cleveland submarket, will record metro-high vacancies as a result, hindering owner’s ability raise rents this year.
With low interest rates improving investor motivation in Cleveland, many owners who held assets through the downturn will begin to divest, spurring increased deal flow. Sales involving performing, higher-end assets will account for a larger share of closings, through competition from regional, high-net-worth-buyers will remain fierce. The availability of upscale, stabilized assets will fall short of buyer demand, potentially compressing cap rates for best-in-class properties below their current average in the low-to-mid 7 percent range. Distressed-asset sales will also play a role as local buyers with extended outlooks target underperforming Class B/C properties, despite some near-term challenges. Attractive per-unit prices for assets in hard-hit areas such as Euclid may provide investors with an opportunity to achieve healthy long-term returns once operations stabilize.
2011 Market Outlook
• 2011 NAI Rank: 40, Down 8 Places. Cleveland fell eight spots in the index due to below-average rent growth, slowing payroll expansion and high home affordability.
• Employment Forecast: Employers will add 11,000 jobs this year, a 1.1 percent increase. During 2010, the work force grew by 17,000 positions, marking the end of four consecutive years of payroll contractions.
• Construction Forecast: After 290 units were added to inventory last year, fewer than 80 units will come online in 2011
• Vacancy Forecast: The vacancy rate in Cleveland will improve 40 basis points this year to 5.6 percent, after dropping 90 basis points in 2010.
• Rent Forecast: In 2011, asking rents will tick up 1.7 percent to $733 per month. Effective rents will appreciate 2.2 percent to $699 per month, pulling concessions below the 10-year average.
• Investment Forecast: This year, cap rates for stabilized Class B assets will average in the low-to-high-8 percent range, while fully occupied Class C properties will trade with initial yields between 9 percent and 10 percent, providing healthy returns for buyers.
Source: Marcus & Millichap 2011 Annual Report
SOLD
Private Investors Target Emerging Opportunities as Employment Stages Recovery
Strong Employment growth and a dearth of new inventory will help solidify apartment operations in Louisville this year. A large portion of job gains will be associated with the recently completed KFC YUM! Center, located near the University of Louisville. Staff additions around the center will help contribute to the expanding the leisure and hospitality sector by 6 percent during 211 as hotels ram up hiring. Moreover, the significant rise in traffic to the area during events will generate hundreds of retail sector jobs are local shops and restaurants, a strong driver of apartment demand. White-collar payrolls will also expand in Louisville this year, especially at the site of the old Haymarket in the West Central submarket. A life sciences center has cleared construction and financing hurdles; development is commencing on the first phase of the project. These high-paying jobs will contribute to an overall increase of 5,700 office-using positions marketwide, supporting a jump in Class A occupancy. With these jobs largely concentrated in the city core, the apartment vacancy rate in the area will dip below 4 percent by year end. Vacancy will also trend lower at the metro levels as the 5,500 new households created this year surpass the projected addition of 2,500 single and multifamily homes.
As institutions pull out of Louisville to redeploy capitol in larger coastal markets, some rarely traded apartment assets will be listed, allowing private buyers and syndicates to acquire properties with long-term stability. Cash-heavy investors will target assets in the core, specifically near the main campus of The University of Louisville, which houses 20,000 students. Northeastern Jefferson County, which will post one of the lowest suburban vacancy rates in the metro this year, will remain attractive to risk-adverse buyers. As private investors compete for quality, stabilized properties, Class A cap rates will dip into the mid-7 percent range. Lower tier complexes will trade 100 basis points to 150 basis points above that rate.
2011 Market Outlook
• 2011 NAI Rank: 22, Down 7 Places. Louisville remained near the middle of the NAI as low vacancy was offset by below-average rent growth.
• Employment Forecast: Employment in Louisville will increase by 7,000 positions in 2011, a 1.2 percent gain. Last year’s cuts totaled 3,400 jobs.
• Construction Forecast: This year, developers will deliver 200 new apartment units, a 0.5 percent addition to inventory and up from 2010, when just 100 units in online.
• Vacancy Forecast: The average vacancy rate will decrease 60 basis points in 2011 to 5 percent, after sliding 140 basis points last year.
• Rent Forecast: Asking rents will rise 2.2 percent this year to $664 per month as effective rents advance 2.3 percent to $632 per month. In 2010, asking rents grew 1.7 percent, while effective rents increased 2.1 percent.
• Investment Forecast: Redevelopment in downtown Louisville and recent expansions to the university will continue to entice syndicates and private buyers to the area.
Quoted Source: Marcus & Millichap 2011 Annual Report
The information provided herein is supplied by various sources and is subject to change without notice. Although Crawford Hoying believes the information is reliable, it does not guarantee its accuracy or completeness and provides said information without warranties of any kind, expressed or implied.
