Strategic Opportunities Drive Record Investment in New Haven Apartments
A strengthening rental market is drawing more multifamily investors toward the New Haven metro area. Property fundamentals are rapidly improving, aided by greater renter demand and a lack of new supply pressure. Solid apartment performance, an array of multifamily assets well-positioned for upgrades and region-leading yields offer opportunities for investors, contributing to a record level of deal volume for the market in 2018.
Apartment properties in New Haven have performed better over the past 24 months than they have at any point in the last 10 years. Positive job growth has renewed renter demand, facilitating vacancy declines and rent gains. Vacancy has fallen 350 basis points since September 2016 to its current rate of 4.1 percent, and as vacancy contracted, rent growth accelerated.
Effective rents began rising in 2017. The pace of growth has been trending upward in 2018, reaching a trailing 12-month appreciation rate of 5.9 percent in September, a four-year high.
These improvements are just as evident in the surrounding suburbs south along the I-95 Corridor and north along the I-91 Corridor as they are in the city of New Haven. The increase in absorption and the resulting impact on multifamily operations has been positive in part because of limited new deliveries.
Development activity in the greater New Haven area has been subdued during the current business cycle. However, the pipeline is expanding as we close 2018. The total supply of apartments in the metro area has expanded by about 5 percent over the past five years, and more than 1,500 new units are set to be delivered by 2021.
Metros in other parts of the country with similar levels of multifamily inventory have seen more than double that level of construction. Existing properties, particularly those on the higher end of the rent spectrum, benefit from less competition from new completions. That is an appealing trait for persons investing in existing assets.
The current state of the market in greater New Haven affords potential buyers opportunities to acquire complexes ideal for repositioning, as well as stabilized assets. Many of the multifamily properties that have changed hands over the past 12 months were constructed around the midpoint of the 20th century or earlier. Renters priced out of the luxury space who still want a comfortable, contemporary living situation must largely turn to renovated older properties.
A building that can be converted from Class C to Class B can considerably improve rents. The average effective rent for a Class B unit is $400 higher per month than the Class C average of $1,084 per month. Rents among Class B product are growing at a faster pace. Investors seeking to update and reposition properties are targeting complexes with high walkability to downtown New Haven and the Yale University campus. Central submarkets such as Wooster Square/Mill River offer such options.
For buyers less interested in making major renovations, Class C apartments currently feature the lowest vacancy rates in the metro area, approaching 2 percent in the suburbs where construction is limited. Annual rent growth was also above 5 percent in the third quarter.
A considerable share of the New Haven and greater Hartford investor pool is based between Boston and Philadelphia. Compared with assets in the major metros of New York, New Jersey and Boston, properties in New Haven feature greater returns and lower entry costs.
The average cap rate on assets traded in greater New Haven over the 12-month period ending Sept. 30 was in the mid-5 to low-6 percent range, up to 150 basis points above yields found in New York City and surrounding metros. Entry costs are also lower, allowing investors priced out of those larger markets to obtain these higher returns in New Haven.
Added to these advantages are the other benefits already discussed, including lower risk of new supply and positively trending fundamentals. The net impact of these factors is a strong year for investment activity in New Haven. If no more properties were sold in 2018, total sales velocity for the year would already be at a decade-high level.
Overall deal volume has also set a record, approaching $350 million for the first three quarters of the year. A handful of large acquisitions by out-of-state investors have aided this swell in volume, although greater competition for the many listings priced below $10 million has maintained a consistent pace of sale price appreciation. At the same time, yields are advancing, partly because some investors are targeting older properties. Overall, 2018 looks to be a banner year for multifamily investment in New Haven and the positive momentum behind the transactions should continue into 2019.