Marc Robinson, Multi Housing Advisors
The healthy, long-term fundamentals are challenged by an apartment construction pipeline that is among the nation’s most active, but so far the market is performing remarkably well. Construction starts in the area have exploded during the last two years, and there are now 8,835 units under construction throughout the Triangle area, with an additional 4,919 units proposed, according to Real Data. Whether demand can keep up with supply has been a widely debated topic among real estate analysts. The high number of units delivered represents an increase in supply of 9.3 percent over the past 24 months.
Strong demand has shielded the region from notable occupancy declines. In the first half of 2014, 2,453 units were absorbed and 2,642 new units were completed, providing a differential of only 189 units, according to Real Data. Average vacancy ticked up to 6.8 percent in July, only 10 basis points above the vacancy level recorded at the beginning of 2014 despite the large number of units delivered.
While this relatively low vacancy rate is indicative of a healthy market, it is still below the post-recession low of 4.5 percent recorded in the second quarter of 2012. However, as demand has caught up with supply, rent growth has remained strong. Same-unit rents grew by 3.2 percent, or nearly $30 per month, between January and July of 2014. The average rental rate recorded for the Raleigh-Durham market was $938 in July compared to $893 at the beginning of the year.
The capacity of this market to absorb supply is due largely to the area’s favorable demographic trends and sustained economic momentum. Job growth in the Raleigh MSA was 3 percent in 2013, and total job growth for 2014 is expected to close out at around 3.8 percent, or 20,500 jobs. The area’s unemployment rate has dropped to its pre-recession level of 5.1 percent, 140 basis points below the state average.
New and expanding companies, particularly in the technology industry, have fueled this growth. They are attracted to the area by its well-educated population serviced by a dense concentration of research-based universities, in addition to the presence of the Research Triangle Park. Of the most notable job announcements in 2014, HCL Technologies is adding more than 1,200 jobs to its Cary campus.
Supply concerns have not fazed investors, as multifamily transactions in the Triangle continue at a breakneck pace. In October 2014, Real Capital Analytics showed that sales volume reached $1.46 billion year-to-date on the heels of an unprecedented 58 transactions, the third most in the Southeast behind Atlanta and Tampa. That volume represents an average price per unit of $105,804 and an average cap rate of 6.3 percent, the second-lowest in the Southeast behind Miami.
Institutional investors, flush with capital and seeking safe yields, have driven down cap rates to pre-recession levels. Like individual investors, they are being lured by the impressive fundamentals and long-term growth prospects of the area. As of October 2014, 41 percent of buyers in 2014 were institutional ones, up significantly from 19 percent a year ago.
Price per unit continues to grab headlines as a number of institutional-grade assets have traded at prices above $200,000 per unit, with Weinstein Properties’ purchase of The Bexley at Park West Village in Cary trading for $205,000 per unit.
The resilience of the Raleigh-Durham market will be tested as new supply continues to enter the apartment stock through 2015. Assuming that not all of the proposed projects come to fruition due to municipal resistance and responsible construction lending, rent growth will likely slow in the short term, but by the end of 2015, healthy levels of demand should catch up with supply and result in a relatively balanced market without excessive vacancy.
— By Marc Robinson, Co-Founder and Co-Managing Partner, Multi Housing Advisors. The article originally appeared in the January 2015 issue of Southeast Real Estate Business.