SOUTHEAST SNAPSHOT, AUGUST 2008

Raleigh Multifamily Market

The Research Triangle Park, a region of North Carolina also known as “the Triangle” that encompasses the cities of Raleigh, Durham, Cary, Chapel Hill and surrounding cities and counties, continues to have better economic performance than the nation as a whole. While real estate activity is decidedly slower in the area than in previous years, development and expansion does continue to occur in the apartment market.

New apartment construction completed in the Triangle in 2007 included 3,667 market-rate rentals and 515 condominiums. There were 1,551 market-rate and 553 condominiums under construction as of the first quarter of 2008. Planned construction is difficult to qualify due to changing economic conditions, but more than 10,000 units are scheduled to be built and another 1,225 have been proposed, according to REIS reports for the first quarter of 2008.

Ashley Park is in Raleigh’s Brier Creek.

The Triangle’s vacancy rate increased from 7.8 percent in March 2007 to 9.2 percent in March 2008 due to the increased level of new supply during the last 6 months of the March 2008 survey period, while absorption has been lower than normal. The absorption in that 6-month period was only 68 units compared to 411 units averaged during the same period the previous 3 years. This decrease in absorption occurred as the job growth for the past 12 months has slowed. Only 788 net jobs were created over the past 12 months, compared to 30,000 new jobs created in 2006 and 2007.

The apartment vacancy rate could continue to increase over the next 12 months. The increase in additional new construction with only average demand will likely increase the vacancy rate to 10 percent. If demand is less than historical averages, the vacancy rate could exceed 10 percent by the spring of 2009. However, indications are that buyers are still in the hunt for apartments in the Triangle, and demand for land is still healthy.  The reality of financing will keep speculation in check for the foreseeable future.

Among sales of large apartment portfolios, Equity Residential made the decision to leave secondary markets and concentrate its efforts in primary markets such as Washington, D.C.  Ed Batchelor, president of Coldwell Banker Commercial TradeMark Properties’ residential asset management division in Raleigh, N.C., estimates that only 2,250 units of Equity’s local portfolio are not under contract or sold. United Dominion Realty Trust completed their exit of the market in March.

Prices do not seem to be softening, however, as foreign buyers are willing to accept 6 percent cap rates for Class B properties, according to Herb Cunningham, multifamily specialist at Coldwell Banker Commercial TradeMark Properties. All told, 7,015 units in the Triangle sold in 23 transactions for a total of $534 million for 2007, making an average sale of $76,122 per unit. Volumes were skewed by the large portfolio sales from Equity in the first quarter, but prices continue to maintain a steady level in this range. 

The average weighted rents have increased 3 percent over the past 12 months, according to the latest Triangle Market Report from The Triangle Apartment Association and Karnes Research Company.  The growth rate was up from the 1.9 percent annual average growth the previous 3 years. Most current residents have indicated they will renew leases with 3 to 4 percent rental rate increases.

The Triangle apartment market will face challenges over the next 12 months if the economy remains slow. However, the long-term outlook still looks robust. The Triangle is the center of our state government, and many representatives and their staffs from across North Carolina rent apartments in the region while the General Assembly is in session, not to mention a great deal of state employees. The Triangle also continues to attract companies seeking highly qualified employees graduating from or affiliated with the area’s respected colleges and universities, including N.C. State, the University of North Carolina at Chapel Hill and Duke University, and many of these newcomers to the area or its job market rely on apartments to serve as their residence. Because of these conditions, the Triangle apartment market will continue to offer excellent opportunities for developers, investors and managers of multifamily communities.

— Brian Farmer is president of Advisory Services at Coldwell Banker Commercial Trademark Properties, a Raleigh, N.C.-based property management, leasing and brokerage services company.

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