Limited multifamily rental development and additional hiring by local employers will sustain another strong year for the Louisville apartment sector during 2012. Despite a slight increase in vacancy during the first three months of the year, tight conditions prevail as many residents moved into apartments during the past two years.
Local employers expanded payrolls during the past two years and more than half of the jobs lost in the metro during the recession have been recovered. The market continues to benefit from the revival of Ford, while the area’s logistics and transportation employers have added workers as more packages and freight move through Louisville en route to other markets.
The reinvigorated drivers of apartment demand continue to benefit most locations around the metro, but none more than the submarkets encompassing suburban communities located beyond the inner beltway. Overall vacancy in this area, which contains about three-fourths of the market’s apartments, sits at less than 4 percent, with the Class A rate closer to 3 percent.
A lack of new construction will keep rents and vacancies healthy in the Louisville metro area. The 35-unit Whiskey Row Lofts in the West Central submarket delivered in the first quarter, becoming the only market-rate rental project to come on line in the past year. An additional 600 apartments are under way in the metro. Only the 150-unit River Breeze has a firm delivery date, with the project slated for completion in the third quarter. Also, 242 units at Claibourne Crossings in the Northeast Jefferson County submarket are slated to break ground in the third quarter.
Renter demand eased in the first quarter, resulting in a 10-basis point uptick in vacancy to 4.5 percent. Vacancy has nonetheless decreased 80 basis points during the past year and sits at one of the lowest levels recorded during the past 10 years. Asking rents rose 0.9 percent from January to March to $667 per month, while effective rents advanced 1.1 percent to $638 per month. Year over year, asking and effective rents advanced 2.8 percent and 3.2 percent, respectively, trimming concessions to 4.3 percent of asking rents.
The strong performance of the apartment sector continues to heighten interest in local properties. Listings of Class A or Class B assets typically generate multiple offers, and cap rates in recently closed deals range from 6 percent to 7 percent. However, few Class A complexes have been built during the past 10 years, and investors are increasingly looking for Class B assets in strong areas. The higher cap rates in recent deals here reflect the metro’s older stock, not newer offerings.
Interest in smaller properties also started to show new life recently, though many owners appear hesitant to list while property operations are strengthening. Nonetheless, the apartment sector’s improved performance during the past year has firmed values, and many well-located assets will attract considerable attention when listed. Interest in distressed properties with either near-term debt maturities or deferred maintenance persists, though competitive bidding continues to push up pricing. These assets are typically purchased on a price-per-unit basis, and many buyers look to later resell the property at exit cap rates ranging from 9 percent to 10 percent.
— Aaron Johnson is a vice president of investments in the Louisville office of Marcus & Millichap