Solid fundamentals in tandem with soaring population growth in the Triangle market continues to drive rents and occupancy to record highs. Raleigh is repeatedly recognized as one of the nation’s best places to live, work and start a business. As a result, the market has a projected population growth of over 73 percent through the year 2044, outpacing cities such as Boston, Atlanta, Nashville and San Francisco, creating a snowball effect of investment and interest.
Investors are finding the greatest opportunities in the value-add space in Raleigh for B and C-class product. Significant shortage of single-family home availability in the Triangle region has forced young and new families to turn to multifamily properties as a housing solution. Due to the demand for mid-size accommodation within middle-class budgets, and very few neighborhoods in that criteria, Class B and C apartments have seen a surge in interest, and in turn, attraction of investor attention. Of the 84 multifamily properties sold through Dec. 1 in 2017, 75 were considered Class B or C and totaled over $1.3 billion, or 76 percent of total Raleigh-Durham multifamily market investment in that time frame.
Developers have slightly overbuilt Class A property downtown, resulting in a softening market and reduced return potentials. The market is expected to level out without significant loss, due to a reduction in the development pipeline, as well as steady demand for the buildings that are already in the works. The 12-month rolling permit totals in Wake County dropped to 3,102 at the end of September 2017, down by 935 units from the previous year. Wake County’s multifamily permits made up 28.1 percent of the total residential permits, a decline from the prior quarter.
Raleigh has experienced a strong trend in place-making when it comes to multifamily development site selections. Led by North Hills, central locations with a variety of options to live, work, play, eat and shop have seen growth in Raleigh that is right on par with the national trends. Developers and city officials are expanding this trend with zoning in favor of more mixed-use projects around the Triangle, reaching across Wake, Chatham and Durham counties. The majority of Raleigh-Durham’s Class B and C properties remain untapped potential.
The rent growth story in Raleigh is much like that of the local economy. We do not see the volatility that many markets experience, and have maintained steady growth. In fact, Raleigh-Durham has delivered positive steady rent growth every quarter since the first quarter of 2010. We see this pace continuing, with the annual effective rent growth forecast to be 3.1 percent from 2018 to 2021 in the Raleigh market, and 3.4 percent in the Durham-Chapel Hill market. That, combined with the demographic growth, will continue to maintain strong occupancy.
The robust Raleigh market is expected to grow as interest rates climb, creating upward pressure on cap rates. Additionally, job creation continues to increase, and population grows with it. Wake County is gaining 63 new residents per day in net migration and natural increase (births-deaths). In 2016 alone, Wake County reported 73 company growth announcements, over 4,700 new jobs and $250 million investments.
The Triangle had a 21 percent expansion in payroll jobs from 2010 to 2016 and outperformed the nation in all key economic measures from 2015 to 2016. With competitive economic growth and nationally recognized allure, the Raleigh-Durham market is an opportunity not to be missed.
— By Steven Peden, Senior Vice President of Multifamily Services; John Manning, Vice President of Multifamily Services; and Eric Death, Associate of Multifamily Services at Colliers International. This article originally appeared in the January 2018 issue of Southeast Real Estate Business.