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Multifamily markets around the country are thriving and Connecticut is no exception, particularly with regard to Class B and Class C properties. The regional mortgage markets have opened up dramatically, approving deals that would have been snubbed a year ago as the market rebounded from the economic downturn. Today, the multifamily sector is alive and well in all classes and markets throughout Connecticut.
When the rebound first began roughly 18 months ago, premium core properties were getting all the attention because of discretionary equity and debt. Lending agencies at the time showed a strong preference for garden-variety Class A suburban and high-rise assets. Terms like “value-add” were barely in their vocabulary then, but now closings labeled as such occur all the time.
Outside of the New Haven, Fairfield and Stamford core markets, however, plenty of REO and distressed real estate is still working its way through the pipeline, from markets like urban Hartford to outlying suburban areas.
Why the delay? For a long time, investors felt repercussions from the market crash, so we had a case of “a falling tide sinking all boats.” Now, while there’s still no urgency to invest in bank-owned real estate, these assets are slowly but surely working their way through the system. It’s worth mentioning that non-REO B and C assets continue to be saleable, even in these areas.
In terms of construction, Fairfield is one county in Connecticut that’s starting to heat up with respect to new permitting and pipeline construction. Lease-up concessions are on the rise in Norwalk and Stamford, particularly in the true Class A markets. Overall, there’s a fair amount of new product, but not a lot of it is slated for completion in 2013. Even though the market is extremely viable right now, investors are modestly erring on the conservative side when it comes to both concessions and rent growth as a result of new construction opportunities, which ostensibly impact cap rates.
The somewhat onerous Connecticut multifamily permitting process constrains the supply of new product throughout the region. Aside from the concerns mentioned regarding Stamford and Norwalk, vacancy issues are rare, and “if you build it, they will come” continues to be our mantra. The limited number of new assets naturally results in great investor competition for the product that does come to market. Consequently, we’re seeing a disconnect between buyers’ and sellers’ expectations regarding cap rates.
One overriding trend is a renewed interest in the building of apartments one or two metro stops away from the urban core. Referred to as Transit-
Oriented Development or TOD, it keeps costs low and demand high. Construction is limited right now, but we believe it’s on the upswing.
Throughout the Hartford/Stamford corridor, apartment communities within walking distance to a train station see both the highest absorption and rent growth. Once some renters reach their price point limit in the Stamford urban core, they move one or more transit stops away, keeping downtown Stamford accessible via a five- to 15-minute train ride and midtown Manhattan a short 30- to 45-minute commute away.
Milford, for example, is on the western edge of New Haven County, making it an excellent TOD play for Norwalk, Stamford and New York City. These TOD markets are coming into their own right now, with real rent growth and extremely high occupancy. They allow renters to pay several hundred dollars less per month and still enjoy all the lifestyle amenities of the city. AvalonBay is among the high-profile developers viewing TOD as a highly viable option.
Wherever they’re built, new properties attract renters, but with such a limited number of assets, older ones can suffer as a result. Recently, a property in New Haven brought 500 Class A units to market. There was skepticism concerning timeliness of absorption, but it occurred within roughly a year — at the expense of older, Class B/B-plus properties. The key takeaway here is that, in Connecticut, the term “value-add” takes on new weight and meaning. When sellers do take the time and effort to improve older properties, they can compete for investors the way few Class A assets can.
– Steve Witten, Executive Director of Insitutional Property Advisors, a division of Marcus & Millichap Real Estate Investment Services