SOUTHEAST SNAPSHOT, JUNE 2012

Raleigh-Durham, North Carolina Multifamily Market

Skow

The return of development in the Raleigh-Durham apartment market should not be surprising to anyone familiar with the market, and neither should the pace of development, which leads the nation when judged by some metrics.

Raleigh-Durham has become one of the most popular markets in the nation for investment over the last decade due mostly to its high-growth status. The Triangle’s existing inventory is relatively young which is appealing to a large number of investors seeking newer product, and this has propelled investment activity. More than $1.2 billion worth of apartments have traded in Raleigh-Durham since the beginning of 2011. Prospects of continued job and population growth are promising, and an analysis of these local trends indicate a need for new development that meets the changing preferences of renters in one of the nation’s fastest growing markets.

Currently, 3,453 new units in 12 communities are under development in the Triangle. This accounts for 3.2 percent of current inventory of nearly 108,000 units. An additional 3,733 units are likely to break ground within the next 18 months. These projects generally represent the most desirable sites within their respective submarkets, are led by well-capitalized developers, and, in most cases, are backed by institutional equity partners. Although there are a number of additional proposed communities, debt and equity still remain somewhat hesitant to commit to sites not regarded as “premier” or lacking strong sponsors.

An analysis of the region’s population growth as the substantial contributing metric of future absorption leaves no doubt of Raleigh-Durham’s appeal as a leading growth market in the nation. The combined Raleigh/Cary and Durham/Chapel Hill MSA gained more than 411,000 residents in the decade between 2000 and 2010 — an increase of 20.5 percent, leading to current population at just over 1.7 million. Additionally, in April the U.S. Census announced that the Raleigh-Cary MSA ranked fifth in the nation for population gains between April 2010 and July 2011. When analyzing only Wake, Durham, and Orange counties, where 99 percent of the region’s surveyed apartments are located, population growth has averaged 3 percent annually since 2000 and is projected to increase by 33,000 every year through 2020, according to the North Carolina Office of State Budget and Management.

To put it into perspective, since January 2000, more than 32,000 units have been added to the Triangle’s inventory. Meanwhile, the January 2012 vacancy rate of 6.6 percent was the lowest since 1999. Apartment absorption has averaged nearly 9.5 percent of the three-county population growth since 2000 — nearly 2,900 units annually. Interestingly, Raleigh-Durham’s population continued to grow during the period marked by the worst job losses in the region’s history, an indicator of in-migration and proof of Raleigh-Durham’s appeal among graduating students, job seekers, and retirees.

So where are the jobs? Employment growth is projected to increase by more than 3.5 percent annually during the next 5 years. According to the North Carolina Employment Security Commission, between January 2011 and January 2012, civilian employment in the combined Raleigh/Cary and Durham/Chapel Hill MSA’s improved by more than 24,800 jobs to 788,700 — just 13,000 jobs shy of peak employment levels. Annual job growth has averaged slightly more than 10,100 since 2000, a period that includes the recent recession and loss of more than 60,000 jobs. The correlation of job growth and apartment demand is a ratio of 2.8 apartment units absorbed for every 10 jobs created, so a major uptick in employment will be a boon for the apartment market based on this history.

Anchored by three large nationally ranked and recognized universities (Duke University, University of North Carolina, and North Carolina State University) as well as the state’s capital, Raleigh-Durham’s healthy and growing economy is complemented by many of the world’s leading tech, medical, and software companies. All of these factors come together to create a highly educated and employed workforce and a unique and stable economy in which to invest.

Downtown Raleigh has evolved into one of the market’s preferred residential destinations with the success of several infill projects and the recent emergence of entertainment and nightlife venues in the central business district and Glenwood South. JP Morgan, Prudential and Mid-America have acquired existing communities in the submarket during the past 2 years, and institutional investment interest in urban product has contributed to the construction of four mid-rise communities totaling more than 950 units near Glenwood South and Cameron Village. Active developers downtown include Northwood Ravin, Faison, Crescent Resources and Southern Land.

Crescent is also developing a mid-rise community near Duke University in Durham. Other active developers include Wood Partners in Morrisville, Post Properties in West Raleigh, Woodfield Investments near the Research Triangle Park, Epoch and Kotarides at Brier Creek, and Dominion Realty at Triangle Town Center in northeast Raleigh.

Concerns regarding Raleigh-Durham’s current pipeline are justified when compared to national starts, yet absorption of 7,000 units during a 3-year period is palatable and in line with historical norms. A close eye should be kept on Raleigh-Durham — perhaps as a bellwether for growth markets in the nation.

— Eric Skow is investment manager at Drucker & Falk in Raleigh.

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