Investors Seeking Yield See Opportunities in Fairfield & New Haven Apartments
Employment gains in New Haven and Fairfield counties, coupled with a bustling job market in the New York City metro, have generated high demand for apartments in New Haven and Fairfield counties, overcoming some of the recent negative optics in Connecticut. Newly hired employees are looking for housing. Employers in New Haven and Fairfield counties are set to add 10,500 individuals to the local workforce this year. And although a significant number of tenants work in the boroughs of New York, they prefer Connecticut rentals due to a significant price differential. Even after considering costs for commuting, the value proposition New Haven and Fairfield counties remains very robust as average rents are priced at approximately $2,000 less per month than those in New York City.
Market demand for housing in these two counties will create upward pressure on rent this year, advancing average effective rent 1.6 percent to $1,635 per month. In 2015, effective rent closed the year at $1,609 per month — an 18.3 percent pace of growth since 2011.
Builders will deliver 2,100 apartments in New Haven and Fairfield counties in 2016, a reduction from the 3,550 apartments that were delivered in 2015; and they are focusing on the Stamford/Norwalk submarket with increasing interest in the New Haven and Central Connecticut markets. The demand will once again outpace supply increases. As a result, vacancy rates will move lower as average effective rents move higher. This year, vacancy will be at 3.4 percent, on par with the end of 2015.
As investors search for yield, they will migrate capital to Connecticut markets where the average cap rates are more attractive. Core Fairfield county cap rates remain in the low 5 percent range while East Fairfield County through New Haven County migrate from the low 5’s for Class A product in prime locations to mid-to-high 6 caps for older secondary product. In general, New Haven and Fairfield counties’ multifamily assets will remain in favor delivering superior yields on equity invested. Class C complexes have initial yields in the high-6 to high-7 percent range. Investors in search of apartment complexes in the $1 million to $10 million range will find attractive listings in the Connecticut submarkets; generally speaking, assets in these parts of Connecticut have a price per unit well below average.
Encouraged by the overall favorable fundamentals and more compelling yields, investors will increasingly put money to work in the Stamford-Norwalk, Bridgeport – New Haven and greater Hartford markets. Exchange-based trades will remain a significant portion of the transaction volume, with regional capital dominating closed transactions. Availability continually holds back deal flow, especially as more participants find the assets attractive, resulting in an imbalance that has pushed average all class per unit pricing into the mid-$140,000s while premium properties have closed as high as $410,000 per unit. Strengthening operations will promote a thriving bidding environment, while the recent surge in buyer interest may draw out an increasing number of sellers as pricing moves to benefit their positions.
— By Victor Nolletti, SVP-Executive Director, IPA (Northeast & Florida), a division of Marcus & Millichap. This article originally appeared in the June/July 2016 issue of Northeast Real Estate Business magazine.