Providence, R.I., is having a good year.
With limited additions to rental supply and favorable regional economic trends, apartment fundamentals in the Providence metropolitan region have been strong in 2007. Additional apartment demand has been spurred by positive economic trends in the area, including solid job growth and encouraging demographic shifts. Despite a slight decline in single-family home prices this year, apartment owners are expected to get a boost from the area's high-priced housing market, as a lack of affordable alternatives stimulates the local renter pool.
MONEY IN THE MARKET The population is expected to continue growing over the next several years, with a total increase over its current 1.2 million residents of less than 1 percent through 2011. Although projected population growth will be reserved, certain age groups are expecting above-average gains, which is promising. The proximity to Brown University, an Ivy League institution that enrolls approximately 7,700 students annually, creates an ongoing boost to the local rental market and attracts recent graduates and young adults to the area.
For starters, the 25- to 29-year-old age cohort is expected to expand 10 percent by 2011—a boon to the local market thanks to this demographic's tendency to rent rather than buy. Meanwhile, the 60- to 74-year-old age group is expected to grow more than 27 percent during the same period. A surge in the retirement-age population will create more health care, leisure, and hospitality jobs whose corresponding wages can prove challenging for homeownership, thus further expanding the local renter pool.
Additionally, these age groups are trending toward downsizing and worry-free housing that requires less effort to maintain, often looking toward rental housing for their retirement and even second home needs.
At approximately $50,000 per year, the area's median household income further supports the demand for local apartments. The median home price hit nearly $300,000 in the first quarter of 2007, while the median price for a condominium approached the $250,000 mark.
This may appear low compared to other nearby East Coast metros, but these price levels preclude a substantial portion of the Providence metro from homeownership: The median income falls nearly $20,000 short of qualifying for the area's median-priced home and $10,000 short of qualifying for a median-priced condominium. Moreover, nearly 40 percent of local households have a median income of less than $35,000 annually, well below the level needed to qualify for a median-priced home.
MORE FUNDAMENTALS
Employment trends in the metro Providence area have been favorable thus far in 2007. The unemployment rate for the metro fell from 6.1 percent at the beginning of the year to 4.8 percent in May, while the state's unemployment rate declined to 4.7 percent in June, signaling continued positive employment trends in recent months.
In addition, the state has introduced 5,400 net payrolls over the last 12 months, and more than 20,000 jobs have been added since June 2003. Income growth this year has been fueled by expansion in the professional and business services sector, which added 2,200 jobs from the 12-month period ending this last June.
Increased development was the primary driver behind rising vacancy rates and slower rent growth in 2006, with apartment vacancy climbing to 10.3 percent.
Though no rental units are scheduled for delivery this year, condo construction spiked during the first half. In the first quarter, for-sale multifamily permit totals were higher than the last three quarters of 2006 combined.
Encouraged by consistently healthy sales in the condo market, developers are expected to bring approximately 800 condo units online this year in Providence; another 600 are in the planning stages. Statewide, more than 1,000 condo units were under construction in August 2007.
This should not, however, negatively impact the rental market, as investors pick up many of the new condos. One of the largest apartment developments under way is the Worcester Mills Artiste complex in the Village of Greystone, a community located in the northwester n cor ner of the city of Nor th Providence. Upon completion in mid-2008, the development will add 136 rental units to the metro, increasing inventory by 0.9 percent.
Still, those builders who have shifted away from rental developments have demonstrated a particular penchant for the downtown Providence area.
For example, two projects totaling about 330 units are under construction downtown and scheduled for a mid-2008 completion. They make up the majority of condo development in the metro area. The Waterplace Park con-dos, located next to the park of the same name, will increase the area's luxury condo inventory by 193 luxury units. The other large project, One Ten Westminster, will bring another 130 units to downtown Providence. This development will redefine the Providence skyline as the tallest building in Providence and the tallest residential building in New England. (Editor's note: Look for more on tall buildings in the October 2007 MFE.)
Affordable housing remains a hot topic in the Providence metro. In July, the Housing Resources Commission awarded $10 million to affordable apartment, housing, and condo projects in Providence and its surrounding suburban areas. Approximately $7.5 million will go specifically to both new construction and the redevelopment of apartment projects in the area with an affordable component.
Additionally, of the 20 projects awarded money, half will be new apartment projects comprising nearly 340 units. Although these units are not expected to directly compete with current market rentals, renters falling on the cusp of affordability guidelines could migrate to these projects.
As a result of positive economic trends, slower development, and uncertainty in the single-family housing market, apartment vacancy rates fell 110 basis points from 10.3 percent at the close of 2006 to 9.2 percent as of the first quarter of 2007. Owners are pushing rents higher in response, but they have kept growth modest to maintain improving vacancy rates.
After recording negative rent growth in the first quarter of 2006, asking rents increased 1.2 percent in the first quarter of 2007 to $1,221 per month. This is roughly $700 below the mortgage payment on the area's median-priced home, creating an affordability gap of nearly 60 percent.
LOCAL INTEL At a more micro-market level, vacancy rates remain elevated around the city of Providence, as new inventory delivered last year pushed rates to nearly 17 percent. Increased demand for rental housing in the area, however, resulted in a 180 basis point improvement in vacancy for the first quarter, pushing the rate down to 15 percent.
In the northern and southern sub-markets of Rhode Island, vacancy has remained low as a result of strong demand coupled with limited construction over the past several years. The north and south Rhode Island sub-markets' vacancy rates have fallen to 5.6 percent and 4 percent, respectively.
While these outer submarkets have traditionally reported lower vacancy rates than central Providence, the Providence submarket has experienced the largest improvement in vacancy in the metro in the first quarter, shedding twice as much as the outer submarkets. Asking rents in the Providence submarket have also advanced at a higher rate than outlying areas of the state.
LOOKING AHEAD A lack of developable land coupled with continued population growth will buttress the Providence apartment market for the foreseeable future. Construction will remain subdued as developers sit on the sidelines or opt for condominium projects. While solid economic trends exist, income levels continue to climb at a slower pace than home prices, positively augmenting the metro's renter pool. Vacancy will continue to improve for the foreseeable future as demand increases, although owners are expected to approach rent increases cautiously.
Steve Witten is a senior director in the New Haven office of Marcus & Millichap's National Multi Housing Group. Tom Hershey, a senior analyst with the firm, contributed to this article.
FAST FACTS Considering Providence? Here's what you need to know:
- Population: 1,648,512
- Occupancy: 92.4%
- Median Age: 38.3 years
- Median Household Income: $48,259
- Average Rent: $1,227
Unemployment: 5.6% NOTABLE: Each summer, the city hosts WaterFire, an environmental art exhibition in which roughly 100 bonfires blaze just above the three rivers in downtown Providence. The Industrial Revolution started in Rhode Island with the 1790 development and construction of Samuel Slater's water-powered cotton mill. Providence is home to America's first enclosed shopping mall, the Arcade, built in 1820.