Construction Activity and Rents on the Rise in Connecticut Apartment Market
Apartment rents and multifamily asset values are rising while vacancy remains low in Connecticut’s New Haven and Fairfield counties. Young professionals and commuters are moving out of suburban areas to reside in downtown locations so they can take advantage of transit-oriented, live-work-play environments. Costly single-family housing is another factor contributing to new residents seeking rentals rather than buying homes. There is a strong demand for apartments, which keeps vacancy low and prompts new development in the region, so much so that delivery of multifamily housing units this year will more than double those built in 2013. Demand however, outweighs the new supply and the current, record-low vacancy levels will be unaffected.
Average prices for apartment assets in New Haven and Fairfield counties rose 3 percent over the last year to $169,000 per unit as the overall quality of listings improved. While the region experiences strong rent growth and higher yields than the likes of New York City and Boston, more foreign investors and institutional buyers continue to emerge with sights set on multifamily assets; and in particular, top-tier assets with more than 250 units in primary markets.
Properties near Metro North commuter rail stations and employment centers will generate elevated investor attention as demand for urban amenities rises. Buyer competition is also increasing as financing for acquisitions is readily available from multiple sources. Lenders are willing to provide capital at 80 percent loan-to-value in many cases for similar properties with strong fundamentals that are located in outlying areas of the market. The compressed 10-year Treasury rate continues to provide record low mortgage rates and terms such as extended interest-only.
Hiring in the region is projected to increase 1.2 percent this year with the creation of 10,000 new jobs. In Fairfield and New Haven counties, employers have added 6,200 jobs over the past year. Fairfield County led new job creation in the region, adding 3,800 new positions, primarily in the professional and business services sector in the greater Stamford area. In New Haven, the largest employment gains recorded were in the trade, transportation and utilities sectors. The health care and education also continue to flourish.
A significant number of projects include mixed-use buildings near Metro North stations and along local bus routes across the counties. The largest assembly of new apartments is in Norwalk, which is situated about 30 miles from New Haven. The Waypointe District in downtown Norwalk will add 465 units upon completion, expected at the end of 2014. The increase in construction activity will cause average occupancy to tick down slightly through year end as new unit absorption has short-term effect on occupancy. Despite the nominal dip in occupancy, the rate will remain well below last year’s level. Limited rentals and a lack of competition from the single-family housing market will drive rent growth for the third consecutive year.
As 2014 comes to a close, there will be about 1,500 units developed in the region, lifting inventory by 1.4 percent. In the coming year, about 1,000 new multifamily units are slated for completion. Over the last year, the largest project to come online was the 344-unit 75 Tresser Apartments in Stamford.
Apartment demand will outpace new inventory this year as vacancy falls 110 basis points to 4 percent with net absorption approaching 2,000 units. Vacancy was the lowest in Fairfield County. It will rise 40 basis points in the fourth quarter of 2014 to finish the year at 4 percent, 110 basis points below the year-end 2013 rate. Average effective rents dipped 0.6 percent marketwide to $1,632 per month by end of third quarter, 2014. In Fairfield County, rents declined 1.5 percent annually as of end of third quarter 2013, to $1,993 per month, while in New Haven County rents rose 2.1 percent year over year to $1,340. Tight conditions will enable a 3 percent rise in effective rents to $1,715 per month by year’s end.
— Steve Witten, Executive Director and Senior Vice President of Investments for Institutional Property Advisors, a division of Marcus & Millichap. This article first appeared in the November/December 2014 issue of Northeast Real Estate Business magazine.