During the last 12 months, the Raleigh/Durham apartment market has continued to maintain a lofty appeal in the eyes of local, regional and institutional investors. The fundamentals of the region, including its growth projections, the diversity of employment and the driving force that is created by three major research universities, has continued to offer good reasons for investors to inject capital into the Raleigh/Durham apartment market.
After a slow start in 2010, many developers have set their eyes on taking advantage of the reduced development pipeline that was a casualty of the recession. The institutions as well as local and regional developers with strong balance sheets were those that were in the best position to take advantage of being the first to break ground. After just a few developments started in 2010, the number of new construction starts and new developments in the planning stages during 2011 has exponentially increased. However, number of new apartment units added to the market in 2011 will be the lowest in recent memory.
Part of the reason for this increase in development activity is that the investment sales market has been so strong in the Raleigh/Durham marketplace, arguably as strong or stronger than any other market south of Washington, D.C. The 370-unit Oberlin Court near Cameron Village in Raleigh which sold this past November for $72.25 million, just over $180,000 per unit, and was reported to represent an approximate 4.5 percent cap rate for the multifamily component. Developers can look to sales like Oberlin Court and feel comfortable that a new, similar project will be successful. Institutional money is flowing into the Triangle due to its strong fundamentals, and many of the acquisitions teams acting on behalf of pension funds and insurance companies have a directive to seemingly acquire the best assets in the Raleigh/Durham marketplace almost regardless of price. At the end of 2011, the aggregate value of multifamily transactions in the Triangle was projected to exceed $750 million, compared with approximately $500 million in 2010.
The developments that are currently underway in the Raleigh/Durham marketplace are generally those that are in the best locations. Developers and lenders want projects modeled after success stories such as Oberlin Court or other well located assets that are in high profile locations or are situated along heavy traffic corridors. Most of the projects that are currently in the pipeline align with this description as opposed to the large number of lower quality projects that were built in mediocre suburban locations prior to 2008.
After years of having very little rental product, the Downtown Raleigh submarket has several projects on the drawing board after two failed condominium projects, The Hue and 712 Tucker, were acquired and converted to rental units in 2010. The tremendous success of both of these projects as rentals has led other developers to contemplate similar apartment developments in this area. Additionally, the areas along Interstate 540, including Chapel Hill, Duke, NC State, Brier Creek, have also been the primary targets of developers for future projects.
As of last December, there were 12 apartment communities under construction consisting of approximately 2,500 new units that will be delivered mostly in 2012, the most since 2009. There were only five apartment communities completed during 2010, representing approximately 1,500 new units. The developers of these projects are clearly in a prime position to take advantage of the current demand for new Class A apartment units. In addition to the 2011 and 2012 projects that are already under construction, the Raleigh/Durham market has as many as 25 proposed developments that have not yet broken ground.
As long as the Raleigh/Durham market continues to show positive job growth (its unemployment rate is currently the lowest of any North Carolina CMSA), as long as the population growth trends continue in the region, and as long as there is a continued shift from homeownership to rentals, this is a marketplace that should be able to absorb the new units that are scheduled to be delivered through the end of 2012. As to whether or not the extended pipeline is realistic, that will likely hinge on the level of success experienced with the projects set to deliver in 2012. Going forward, we will also need to keep our eyes on interest rates and consider how a sudden rate spike in 12-18 months might impact financing for new development projects as well as acquisitions or refinances.
— Daniel Eller is a managing partner of The Carolinas Multi Housing Group, a real estate investment firm specializing in the acquisition of multifamily assets throughout North Carolina and South Carolina.