SOUTHEAST SNAPSHOT, OCTOBER 2008

Louisville Multifamily Market

Increasing demand for affordable housing will provide for modest rent gains in the Louisville apartment market this year, despite an uptick in inventory and slowing job growth. Cooling national and local economic conditions are expected to cause manufacturing companies to shed positions throughout the year, although expansion in Louisville’s trade, transportation and utilities sectors will moderately offset the market’s layoffs. The Kentucky Economic Development Finance Authority continues to provide tax incentives and favorable financing packages to attract businesses to the metro area, and the state was recently ranked the 10th most business-friendly environment in the nation by Expansion Management magazine.

While employment growth is relatively stagnant, the educational, health services and government sectors will continue to add positions at a fairly steady clip. Losses in the manufacturing segment have weighed on overall expansion over the past 12 months, as local employers have created 400 new positions, a 0.1 percent uptick. Employment growth has been particularly strong in the metro’s government sector, which has gained 2.9 percent year over year with the addition of 2,300 jobs. Louisville’s employers are forecast to expand payrolls by 500 positions this year, a 0.1 percent gain.

On the supply side, development activity is forecast to pick up in 2008, with total new inventory expected to exceed the 5-year average by 13 percent. Developers currently have 350 units underway in the Louisville metro area, though construction is expected to accelerate as there are nearly 1,000 units in the planning phases. The largest complex under construction is the 333-unit Liberty Green at Liberty and Clay streets; the project is scheduled for completion during the latter part of 2009. Builders have been focusing on the development of condo projects, as there are approximately 1,400 units underway. The Northeast Jefferson County submarket is expected to receive the majority of the new for-sale construction, or nearly 700 units. Apartment developers are forecast to bring approximately 500 units to the local market in 2008, up from 440 units last year.

Over the past year, vacancy has decreased by 110 basis points to 6.3 percent. Additional stock is expected to reach the market in the latter part of the third quarter, putting upward pressure on vacancy. Vacancy has fallen 120 basis points year over year to 6.7 percent in the metro area’s Class A properties, aided by steady tenant demand that has been generated by job growth and minimal new competition. In the market’s lower tiers, vacancy has shed 110 basis points to 6 percent in the last year due to rising demand for affordable housing and lack of new class B and C competition. Subtle employment growth and an uptick in deliveries are expected to drive vacancy higher during the second half of the year. Vacancy is forecast to rise 20 basis points in 2008 to 7.4 percent.

Louisville’s asking rents ended the first quarter at an estimated $641 per month, up 4.4 percent year over year. Concessions have fallen due to tighter market conditions, with owners raising effective rents 5.3 percent in the past 12 months to $613 per month. Asking rents in the metro area’s Class A properties increased 4.5 percent in the last year to end the first quarter at $798 per month. In the lower tiers, asking rents advanced 4.1 percent to $559 per month. Rent growth in Louisville is expected to decelerate by year end as economic conditions soften further. Asking rents are forecast to rise 2.8 percent to $645 per month this year, while effective rents will advance 2.7 percent to $614 per month. In 2007, asking and effective rents gained 3.6 percent and 4.7 percent, respectively.

Investor demand for Louisville’s apartment properties will remain steady this year as buyers continue to target the city for its higher initial yields and affordable prices. Owners with holding objectives exceeding 5 years may want to consider opportunities near downtown revitalization efforts, including the Museum Plaza and Cordish Company’s City Center project. These developments are intended to bring more businesses and people to the renewed downtown area, supporting demand for affordable rental housing. Investment activity within the Louisville apartment market is expected to remain healthy, as attractive yields and valuations are drawing a higher number of out-of-state buyers.

— Aaron Johnson is a senior associate in the Louisville office of Marcus & Millichap Real Estate Investment Services.

©2008 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.