Hartford, Conn.'s multifamily market is poised for solid growth in 2006, spurred by the more than $2 billion in public and private investments that have been infused into revitalizing the city's urban core. Hartford's redevelopment plan is being modeled in part after New Haven's urban revitalization efforts, which began a few years ago. "After years of planning, false starts and frustration, Hartford's renaissance is finally moving into high gear," according to the Hartford Business Journal.
A key piece of the revitalization effort is the 33-acre, $860 million Adriaen's Landing project, which includes a new convention center, upscale hotel, retail, and office space as well as cultural attractions. The hotel, convention center, and parking garage are complete, and ground was broken for the science center in fall 2005. Another major development is the 409-key Marriott Hartford Downtown Hotel, which opened its doors in August 2005. These projects are expected to attract more business to Hartford, which in turn is expected to lure more retiring baby boomers, as well as echo boomers. Increased demand from these two segments of the population would boost the multifamily market in Hartford this year.
Buoyed by Boomers
Also boding well for the for-sale apartment market is the number of affluent retirees who wish to maintain a residence in Hartford. The renewed urbanism (urban sprawl) should quickly absorb the 1,000 new owner-occupied housing units coming on line. Some retirees want to keep a residence in Hartford while participating in the "snowbird" trend of heading to Southern climates for half of the year. This portion of the population also has an impact on multifamily numbers; some maintain their homes, keeping single-family residences out of the market, while others rent during their seasons in Hartford.
The second demographic shift comes from echo boomers. Echo boomers are typically classified as the children of baby boomers, born between 1982 and 1995. Descended from America's largest and wealthiest demographic category, the adult segment of the echo boomers (aged 18 to 24) brings money and attitudes that are extremely favorable to multifamily property investors in the midst of Hartford's revitalization. These young adults value cultural ideas of fitting in, upscale and eclectic dining, retail shopping as an event, and being connected to a diverse community, and their presence in Hartford should help improve occupancy levels by the end of 2006.
The echo-boomer influx and attitude may be crucial components in the success of Hartford's downtown redevelopment. The city is taking cues from markets nationwide that are responding to attitude changes about geographic relationships between life and work space. The suburban trend of substantial distances between the workplace and home is showing signs of reversal. People are more interested than ever in the combination of these two zones.
Shaping the Sector
Nationwide, users have embraced the live/work unit at levels so intense, they haven't been witnessed in 50 years. The choice is often economically and environmentally preferable, and fits well with professional and business-services sector employees who are tired of wasting valuable living hours gridlocked in rush-hour traffic. The seclusion of a subdivision is coming at a high cost in terms of time, fuel, and stress. New multi-use projects in Hartford's downtown area are designed to capitalize on this shift in perspective. Apartments constructed in these multi-use spaces appeal to echo boomers' cultural preferences for accessible retail, conforming to a community identity, and the diversity associated with urban lifestyles. From a development perspective, the creation of a 24/7 central business district means catering to a population that works, dines, shop, and thrives in revitalized downtown districts at all times of the day.
This approach has worked well in New Haven's central business district. Asking rents have been pushed up to an average of $1,498 per month for Class A apartments, with effective rents climbing at a similar rate to an average of $1,437 per month. New Haven's multifamily vacancy rate is projected to fall 20 basis points to a low of 4.3 percent by the end of 2006. In turn, interest in properties which can be renovated to luxury status has risen in New Haven as revenue growth for Class A apartments is forecast to exceed 6 percent. Class A multifamily properties in downtown Hartford such as Hartford 21, Sage Allen, and Trumbull on the Park will surpass New Haven rents by 10 percent to 20 percent; this is greater than any other market in Connecticut outside of the Gold Coast of Fairfield County.
On the Horizon
Construction projects in the past few years have lowered occupancy levels, but absorption will stabilize, since few new units are expected to come online this year. Last year, the Hawthorne at Gillette Ridge project in Bloomfield added 246 one- and two-bedroom apartments, ranging in size from 677 square feet to 1,500 square feet, with rents ranging from $1,010 per month up to $2,288 per month. Another 2005 project was Mansions at Hockanum in Vernon, which contributed 424 one- and two-bedroom units ranging from 740 square feet to 1,013 square feet. Rents there range from $995 per month up to $1,495 per month.
Several projects are slated for completion this year. They include the 120-unit Sage Allen, which will feature studio units with prices ranging from $750 per month to $2,500 per month. Hartford 21 is a mix of housing, retail, and office space in a 36-story high-rise tower that includes 262 luxury apartments along with 93,000 square feet of office and an 800-car garage. The 1429 Park Street project is scheduled for completion in 2006 as well, with 56 one-bedroom lofts. Despite new multifamily inventory, Hartford's vacancy rate of 5 percent to 5.2 percent is still below the national range of 6.1 percent to 6.6 percent. By the beginning of 2007, Hartford is projected to return to 96 percent stabilized occupancy.
Though some new properties (both rental and for-sale units) are coming online through 2006 and 2007, Hartford's supply-constrained market will limit new condominium and multifamily construction projects other than adaptive reuse of functionally obsolete properties. The majority of multifamily transactions in Hartford tend to be older, vintage brick buildings of 20 to 60 units, some from as early as the turn of the 20th century. Most of these well-located, B-quality properties were built between 1950 and 1970, with average per-unit values still under $50,000. There is a fair amount of transaction velocity in the local market. Year-to-date in Hartford County as of June, 1,333 units have traded for $90 million with average per-unit values just over $67,500. Sales volume is on par with 2005, in which a total of 2,178 units traded for $132.3 million (just under $61,000 per unit). Most of the inner- city projects tend to focus on the adaptive reuse of older mill buildings, office/retail buildings, and some mixed-use properties.
One combination of new construction and historic renovation in downtown Hartford is the Trumbull Centre, completed in January 2005 (also known as Trumbull on the Park). Located across from Bushnell Park, the $38.5 million mixed-use development features a nine-story apartment structure with 88 park-view units, an 11-floor, 600-space parking structure, and 12 additional luxury apartments in two adjoining historic buildings. Service, retail stores, and restaurants fill the ground floor of the development. Part of the project included the restoration of the two so-called Lewis Street buildings, which had deteriorated after years of neglect. The strategically located Trumbull Centre property is an example of the type of lifestyle the rising echo-boomer population prefers, and the ancillary impact on other properties in Hartford's downtown district is financially positive, as many of the surrounding properties are also improving facades, renovating interiors, and adding new, upscale retail tenants and restaurants.
Transaction velocity on buildings in the Class A segment of the multifamily market is low. In 2005, only 414 luxury units traded, and year-to-date there has only been one sale of 294 units. Construction costs have risen faster than inflation, and hurricanes have damaged critical ports elsewhere in the country, placing additional reconstruction demands on material and labor supply. With construction costs rising and a reasonable ceiling on rents, developers can only afford to build Class A luxury units. Very few of these Class A properties are trading hands, as they are typically undertaken by build-and-hold developers.
With apartment sales well below replacement cost, a supply-constrained market, and a renewed urbanism, Hartford offers opportunities that weren't available there not that long ago.
Considering Hartford? Here's what you need to know:
1 Population: 124,683 (town); 881,552 (county)
2 Occupancy: 95% (as of June 1, 2006)
3 Median Age: 31 years
4 Median Household Income: $26,502 (town); $55,606 (county)
5 Unemployment: 9.9%
Notable: Humphrey Bogart got married in a Hartford apartment building in 1928. Home to the Wadsworth Atheneum Museum of Art, the nation's oldest public art museum. Also home to the nation's oldest insurance company and often referred to as the Insurance Capital of the World.
High Wire
Copper pricing soars. Just as rebuilding efforts across the country have hit full stride, builders are facing new pricing and availability challenges that could affect not only their schedules but their bottom lines, too.
In particular, copper pricing has more than doubled since January, marking a massive run-up that's left economists scratching their heads and builders scratching their plans. In February, the price of copper sailed past the previous pinnacle of about $3,400 per metric ton, a record set in the '80s, and didn't stop until it reached $8,700 per metric ton in mid-May.
"It's being driven largely by speculation, in my opinion," says John Mothersole, senior economist at Lexington, Mass.-based Global Insights. "There's no underlying reason for that kind of increase ... and it's a magnitude beyond what the fundamentals in the market could support."
On average, there are 278 pounds of copper in a 1,000-square-foot multifamily unit, according to the Copper Development Association.
With mid-June prices around $6,200 per metric ton, Mothersole predicts that copper pricing has peaked and will continue to drop in coming months.
But Michael Carliner, an economist at the National Association of Home Builders, isn't so sure. "Copper prices are likely to remain high, and prices for many copper-using materials and products will become more expensive," he says. "Air conditioning equipment, for example, uses a lot of copper, but the prices haven't adjusted." Carliner adds that manufacturing capacity is not expected to increase this year.
Still, says Mothersole, the high point likely has already passed. "We're setting up for a serious correction now," he says. "Production is higher than consumption ... which will make it very difficult to sustain this kind of pricing."
–Kate Herman
Raising the Rent
Occupancy goes up as completions keep heading down.
Healthy occupancy rates plus a plunge in completions create a scenario in which rent seems likely to rise, predicts multifamily brokerage and research firm Marcus & Millichap. On a year-over-year basis, occupancy has improved 100 basis points despite the fact that occupancy nudged down to 94.2 percent during the typical seasonal slowdown in the first quarter.
Meanwhile, developers continue to focus on condo construction and conversions. Apartment completions during the first quarter tumbled a whopping 50 percent from the quarterly average over the past two years; the index stands barely above half the level it stood at for the fourth quarter of '05. Conversion activity has reduced inventory considerably: In the past 12 months, 115,000 rental units have been sold for conversion.
Thus, it's no surprise that the revenue index recorded strong growth in the first quarter–indeed, the best growth since the market bottom of late 2002, increasing to nearly 95 percent of 2000 levels.
Over the past year, effective rents have increased 7.4 percent, of which a 5.5 percent gain was recorded in the first quarter of 2006 alone–the largest quarterly in-crease since 2000. With the tightening of occupancy rates expected to continue, effective rent growth will stay at healthy levels and likely surpass the 2000 level by the end of the year, Marcus & Millichap says.