As anyone who's been to New England knows, Yankees see themselves as an independent-thinking bunch. After all, New Hampshire's state motto is "live free or die."
At the same time, though, New England's multifamily markets do share a few characteristics. Infill is popular, and so are redevelopment opportunities and value-added deals. The hot spots? Connecticut's urban markets, such as Stamford and Hartford, and Boston, of course. But improving demographics and investor interest also make sleepers such as Portland, Maine, and Providence, R.I., worth watching in the year ahead.
Connecticut
Fueled largely by public/private redevelopment initiatives and downtown projects, Connecticut's major cities are poised for solid growth in 2007.
In Stamford and Bridgeport, where vacancy remains low at 3.2 percent and 3.3 percent relatively (compared to the national average of 5.4 percent), the scarcity of developable land has led to an ongoing push for downtown redevelopment.
Stamford offers waterfront properties and accessibility to New York City, both of which appeal to residents and luxury multifamily developers. New development will remain minimal, however, until apartment fundamentals show greater improvement.
In Bridgeport, a new project called Downtown North is reshaping the city. The effort, which involves the conversion of the Citytrust Bank building into 118 rental apartments and 29,000 square feet of commercial space, is expected to be viable in spite of the high commercial vacancy rate, since demand is expected to increase in the near future.
Investment sales activity in the Greenwich, Stamford, and Bridgeport areas remains strong, with the big deals happening–not surprisingly–in the affluent town of Greenwich. One recent deal: Milbank Commons, which commanded $25 million, or $1.47 million per unit, for the 17-unit asset, in a sales price on par with Manhattan. Other transactions are almost as rich. Last February, 100 Putnam Green, which is two properties built in 1967 and 1971, traded for $223 million. The project, which is slated for conversion to condominiums, typifies the product that sells Connecticut today: extremely well-located assets constructed between the 1950s and the 1970s.
Other Connecticut cities are also going urban, including Hartford. The cornerstone of Hartford's downtown revitalization effort? The 33-acre, $860 million Adrian's Landing project, which is a mixed-use property with a new convention center; upscale hotel, retail, and office space; and other cultural attractions. However, while redevelopment efforts may be heating up in Hartford, new condo and rental construction will continue to be limited.
In New Haven, cultural attractions, more affordable housing than New York, and a growing student population make this city a great model for re-urbanization by both lifestyle renters and baby boomers. And, not surprisingly, given this renewed interest in downtown, overall multifamily market conditions are improving in New Haven's central business district. Asking rents have increased to an average of $1,498 per month for Class A apartments. Vacancy rates are falling, to a projected low of 4.3 percent in 2006. And, with revenue growth for Class A apartments forecast to exceed 6 percent by the end of 2006, interest has been growing in properties that could be renovated and repositioned as luxury product.
Overall, more than 5,600 multifamily units are expected to be traded across Connecticut in 2006 for a total estimated sales volume of $502 million. Spurred by a combination of echo boomer demand and capital from retiring baby boomers, the state's urban centers will continue to improve in 2007. Public/private ventures, coupled with creative historic adaptive renovation and mixed-use projects, will hasten these improvements. While Hartford is a strong growth market, well-located, value-added plays in downtown New Haven, Bridgeport, and Stamford also are solid investment choices.
Massachusetts
Boston, which is the other leading New England multifamily market, boasts both a large number of well-paying jobs and a high cost of living. It's a good situation for apartment fundamentals, even in a cooling local for-sale housing market. While sales and appreciation is slowing, homeownership will continue to remain out of reach for a large share of Boston area residents.
Apartment construction has accelerated over the past year, but due to high land and construction costs, much of the development activity is focused on high-density Class A projects. If it's not luxury, then a project usually includes a government subsidy or an affordable housing component. Overall, Boston's vacancy rate has remained at 4.5 percent to 5.5 percent during the last three years.
Those interested in investing in properties outside of Boston must know their apartment fundamentals. With the condo conversion market retreating, investors have shifted their underwriting focus from capital appreciation to income growth. Market-wide cap rates may decline modestly over the near term as private investors look to local properties for long-term stability and consistent returns.
The average asking rent is expected to rise to $1,635 per month by 2006's end, driven in part by the addition of high-end supply. Effective rents are forecast to post a similar gain, to $1,550 per month. Rent growth is the key to dynamically underwriting and forecasting the value of multifamily properties across New England.
Rhode Island
Another New England market to watch in '07 is Providence, R.I., where recent brownfield redevelopment and downtown revitalization efforts are sparking real estate investment.
In spring 2006, the federal government committed $1.4 million to redeveloping contaminated brownfields in the Rhode Island. Providence also received a grant to clean up the former Lincoln Lace and Braid Mill site, which will clear the way for the construction of two soccer fields. And three years ago, the U.S. Senate provided money for the enhancement of the Woonasquatucket River Greenway, a seven-mile green corridor that runs west from Providence to Smithfield.
In a similar project, Burrillville, R.I., received funding to clean up the Stillwater Mill Complex, which will allow the city to replace a 1935 library with a modern structure. The new library and meeting center is the centerpiece of the $70 million Stillwater Mill project, which will provide seniors and affordable housing for community members.
In all, approximately $92 million in five apartment sales were closed in Providence in 2006 (as of this fall), including the $52 million sale of Cumberland Crossing, a 288-unit apartment complex in Cumberland, R.I. Apartment units in the Providence metro area sell for a median price of $58,594.
New Hampshire
Two major sales made headlines in New Hampshire this year. In Nashua, Princeton Properties acquired Boulder Park, a Class B asset, for nearly $54 million. It's a large property, encompassing 40 acres of land, 14 buildings, and 482 units. And, in Concord, Dolben Co. of Burlington, Mass., purchased its first New Hampshire holding: the Class B Penacook Village Apartments. The deal, which is valued at $17.6 million, includes 45,000 square feet of commercial space.
Why the interest in New Hampshire? Improving demographics and a relatively inexpensive cost of living, which allows smart investors the chance to take advantage of value-added properties in the state.
Maine
Southern Maine is growing, which is great news for the Portland multifamily market. So is the rest of the state. Since 2000, the state's growth rate has nearly doubled.
In addition, a shift away from manufacturing is reshaping the state's economy. Goods production, consumer services, and business services are fueling the state's economy and account for a combined 41 percent of all employment in Maine, according to the Brookings Institute.
These changing demographics have lured large apartment owners to southern Maine. Lowell, Mass.-based Princeton Properties, which is one of the largest multifamily property owners in New England, recently acquired a 170-unit rental project in Falmouth, Maine, for $16 million.
As for overall investment sales conditions in the city, the median sales price per unit in the Portland metro area stands at $97,059, one of the highest in New England. There has also been some significant multifamily development activity for the market. According to Marcus & Millichap, five new apartment projects recently came online in the Portland area, with one more expected by 2006's end.
Fast Facts
Considering New England? Here's what you need to know:
1– Population: 13.9 million (2000 U.S. Census)
2– States: Connecticut, New Hampshire, Maine, Vermont, Massachusetts, Rhode Island
3– Unemployment: 4.7% (as of September 2006)
Notable: Boston's subway was the first one built in the Western Hemisphere ... Mount Washington (elevation 6,288 feet) in New Hampshire stands as the highest summit east of the Rocky Mountains ... The world's first nuclear-powered submarine, the USS Nautilus, was launched at Groton, Conn., in 1954.
–Steve Witten is a senior director of Marcus & Millichap's National Multi Housing Group in New Haven, Conn.
Location Counts
Apartment and condo residents want short commutes.
Urban living is as hot ever, and we've got the numbers to prove it: About half of all households moving into apartments and condos with five or more units chose a central-city location, according to a NAHB study of data recently released from the 2005 American Housing Survey.
So what exactly draws multifamily residents to the city? A shorter commute tops the list. Approximately 40 percent of both renters and condo owners surveyed said they selected their neighborhood to be close to jobs, compared to just 24.5 percent of single-family residents. Next on the list: aesthetics. Multifamily residents value the looks and design of their neighborhood.
Interestingly, the percentage of households moving to cities has been fairly stable since 1997, which may be disappointing to infill developers hoping for increased activity in inner city real estate markets, says Paul Emrath, NAHB's assistant staff vice president of housing policy research. But developers don't seem to be having trouble filling their urban units.
"We'll look at any infill location we can find," says Tony Rossi Sr., president of Chicago-based RMK Management. "People prefer these areas, and they will pay a bigger price just to get that superior location." And if gas prices stay high, you can bet that shorter commutes will be at the top of everyone's holiday wish list.
–Rachel Z. Azoff
Stat to Watch
Conversion Crash
Once-popular condo conversions fall out of favor. The condominium conversion craze hit the skids as conversion sales fell to $248 million in September 2006 from a monthly peak of more than $4 billion a year earlier, according to data from Real Capital Analytics, a real estate research firm based in New York.
Multifamily executives weren't surprised. "We had some projects that started as apartments and got switched to condos, and then they ended up as apartments again," says Kevin Andrade, senior managing director of Trammell Crow Residential in Southern California.
Analysts say the multifamily market is strong enough to absorb the market shift. "A lot of these converters are able to resell to someone who wants to hold it as an apartment complex," says Dan Fasulo, director of market analysis, at Real Capital Analytics. "I see no significant losses."
Fasulo says that's because there's more information available to the industry now. "The markets were pretty much able to step on the brakes very rapidly this cycle," he says. "Investors saw what was happening–banks, developers. There's more information for making decisions."
In fact, Andrade says the switch hasn't hurt Trammell Crow. "We're able to move quickly between rental and condo and land flipping and whatever is profitable at the moment."
–Nichola Zaklan