SOUTHEAST SNAPSHOT, MARCH 2007

Louisville Multifamily Market

Investors from across the country will continue to place their capital in the Louisville, Kentucky, apartment market this year. Many properties offered for sale in the metro area can be acquired at prices below national averages, and cap rates are typically greater than national averages. Given these factors, investors will have ample opportunities to add value to existing apartment assets in the Louisville region.

Marcus & Millichap projects that vacancies will remain in the low 8 percent range this year. Construction activity is forecast to decline modestly this year, as developers plan to deliver a total of 500 units. Last year, 574 new units were delivered, which was a substantial increase from the 283 units that came online in 2005. In spite of higher construction levels in 2006, the overall vacancy rate in Louisville declined 50 basis points, supporting the strongest effective rent growth since 2000. Decreasing concessions and rising rents are attracting investors to Louisville apartment properties. Investors can expect solid rental-rate growth throughout 2007. Average asking rents are expected to increase approximately 3 percent from $605 to $623 per month by year’s end.

The East End submarket area will continue to attract renters, which is expected to push vacancy down by year’s end. In downtown Louisville, redevelopment activity will draw additional renters to the area, but the lack of community services in the CBD will continue to hinder unit absorption this year. Downtown, however, remains an emerging submarket — with Fourth Street Live and other redevelopment projects under way — which will likely attract some investors seeking value-add opportunities as the year unfolds.

The residential market has stabilized, which bodes well for the local apartment market. Due to higher interest rates, many homebuyers are choosing not to buy first-time homes and are instead entering the rental market.

Capital continues to flow into the Louisville apartment market from many major financial centers, including New York, California and Florida. These investors are eager to take advantage of Louisville prices, which are lower or competitive with other mid-markets.

Many REITs, institutions and tenancy-in-common investors will continue to acquire Class A assets this year, while private groups will remain interested in B and C properties for repositioning opportunities. In the second-highest apartment sale of 2006, a New York City investor acquired the Americana complex, for $12 million. The new owner will be investing millions of dollars of capital into the 622-unit apartment complex. And based on the Americana acquisitions, this investor is eager to purchase additional value-added plays in the region.

Investors will remain attracted to Louisville because cap rates are still slightly higher than national averages and pricing remains competitive with other mid-markets. While a number of properties were purchased last year and in 2005 for condominium conversion, the condo market has completely slowed down. In 2007, both regional and out-of-state investors will continue to invest in cash-flowing apartment properties.

— Gary Lucas is a senior vice president and the managing director of Marcus & Millichap’s Louisville office. Javan Montgomery and Aaron Johnson are multifamily investment specialists in the Louisville office.


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