Hampton Roads Apartments a Gold Mine for Yield-Seeking Investors
Seeking higher yield, private capital multifamily investors are increasingly looking to the Norfolk-Virginia Beach-Chesapeake MSA. This region of seven cities and a population of more than 1.7 million people is known collectively as Hampton Roads. Strong fundamentals, a youthful population and an expanding economy offer more promising returns than most surrounding MSAs.
Compressing cap rates
Over the last 12 months, cap rates compressed nationwide. In Hampton Roads, Class A cap rates ranged between 5.25 and 5.50 percent. There is very little spread between Class A and going-in cap rates for well located, true value-add deals.
Notable recent sales include the Waypoint Portfolio in Newport News, Trail Creek in Hampton and Brookfield and Woodshire in Virginia Beach. Collectively, cap rates for these transactions ranged from 5.50 to 5.75 percent.
Transaction volume in 2018 exceeded $665 million. With deals in the MSA now trading as high as $70 million a piece, more private equity groups nationwide are seeking to invest in the market.
Fundamentals in Hampton Roads continue to improve with steady year-over-year rent growth and occupancy near 95 percent. With numerous MSAs battling oversupply and concessionary pressures, Hampton Roads apartment owners benefit from a more modest development pipeline.
CoStar Group ranked Hampton Roads as one of those nationally with the least supply pressure, with only 1.6 percent of total inventory currently under construction. New construction and previously proposed projects are experiencing delays as developers face rising construction material and labor costs.
The highest income demographics are flocking to Norfolk, Virginia Beach, Chesapeake and Williamsburg, supporting new construction in these submarkets.
Downtown Norfolk, considered the region’s central business district, has witnessed a revitalization as renters seek a live-work-play lifestyle and are attracted to the concentration of restaurants, entertainment and shopping, including the newly refurbished Waterside district.
New projects in the market
Approximately 1,000 units have been repurposed or added to supply over the last 24 months, most notably ICON. The downtown Norfolk high-rise offers residents unobstructed views of the Elizabeth River from its rooftop pool deck. The community also includes a climate-controlled wine vault, wellness spa, hydro massage rooms, penthouse VIP room and concierge services.
Where Norfolk meets the Virginia Beach city line at Northampton Boulevard and Interstate 64, Simon Property Group recently opened Norfolk Premium Outlets.
Across the freeway, IKEA is under construction with an opening set for this spring. Burton Station and Coastal 61, two proposed Class A garden developments, are poised to take advantage of more than 1,000 jobs brought to the region by these national retail brands.
Further east, Virginia Beach Town Center, a preeminent shopping and employment destination, is set to deliver Premier Apartments in 2019, the only ground-up high-rise development in the region.
Chesapeake is enjoying the historic expansion of the Dollar Tree headquarters, a Fortune 500 company that will bring an additional 700 jobs to the area. The surrounding $300 million Summit Pointe development includes residential, office and entertainment amenities.
Williamsburg/York County, the most northern submarket in Hampton Roads that is touted for its high quality of life and sought-after schools, attracts developers with excellent fundamentals. The submarket’s new high-end multifamily development, Elan Williamsburg, is a prime example of national developers targeting more tertiary markets.
With a multitude of military installations and seven separate nonprofit universities with more than 50,000 enrolled students, it’s apparent why Time magazine ranked the region as the No. 1 city attracting millennials by percentage in the country, and the regional economy is diversifying to retain top talent. The resulting population demographics are attractive for apartment owners in Hampton Roads with nearly a quarter of the population between the ages of 20 and 35, according to the U.S. Census Bureau.
Military-related spending contributes more than $20 billion annually to the region’s economy, often buffering the region from recessionary pressures. Old Dominion University economists expect federal spending in the MSA to increase $3 billion this fiscal year and $4 billion in fiscal year 2019.
The recent September signing of the 2019 Defense Appropriations bill includes a 2.6 percent pay raise for all service members and includes funding for shipbuilding projects, benefiting private companies like Huntington Ingalls Newport News Shipyard, which employs 20,000 residents.
Virginia Beach is diversifying into data and technology. The city has four of the world’s fastest subsea transatlantic data cables, built by companies including Facebook, Microsoft and Google, connecting Virginia Beach to Europe, Africa and South America.
In healthcare, several facilities are currently under construction as existing providers expand their local presence, including Sentara Norfolk General, Eastern Virginia Medical School, Children’s Hospital of the King’s Daughters and Sentara Leigh, with investments totaling more than $430 million.
Investors and developers remain bullish on the region. Increased defense spending, solid fundamentals and a diversifying economy should continue to expand the investor pool in Hampton Roads.
While often overlooked by many institutional investors, some consider Hampton Roads a best kept secret for multifamily.
By Hank Hankins, senior vice president at Colliers International, and Victoria Pickett, vice president at Colliers International. This article originally appeared in the February issue of Southeast Real Estate Business.