Though located in the smallest state in the union, the Providence multifamily market is set to post some big numbers.

Rent growth throughout the metro area is expected to exceed 3.6 percent annually for the next five years. And the city's employment market is forecast to improve more than 1.7 percent per year during that span, according to New York–based market research firm Reis.

In fact, May marked the fifth consecutive month-over-month increase in labor force throughout the state. The unemployment rate has dropped from 11.9 percent in January to 10.9 percent as of May. And the private-sector market saw healthy gains in May, led by the leisure and hospitality and professional and business services sectors.

Providence is also posting some small numbers in all the right places. The amount of new supply coming on line will remain muted, with no new units expected this year and just 198 units next year. And the area's vacancy rate is forecasted to slowly drop from 5.5 percent in the first quarter to 4.5 percent by 2014.

Add it all up—an improving economy, the lack of new supply, not to mention a continued flight from homeownership—and you've got some strong rent growth on the horizon.

Improving Fundamentals

The greater Providence multifamily market consists of three submarkets and more than 16,300 professionally managed rental units. Effective rents average $1,157 per month across all of those submarkets but should climb about 3.4 percent by year's end, according to Reis.

The core Providence apartment market— the urban downtown area, which consists of 7,309 units—had a vacancy rate of 6.1 percent in the first quarter, a significant improvement over the 10.8 percent exhibited in the third quarter of 2009. Effective rents were $1,286 as of the first quarter of 2011.

Meanwhile, the suburban Providence multifamily market is showing slightly stronger fundamentals, based on a recent survey of nine properties, totaling 2,489 units, in Cranston, West Greenwich, East Greenwich, West Warwick, Johnston, North Providence, and Cumberland. These properties exhibited a 5.7 percent vacancy rate with average onebedroom rents of $1,219. Current concessions in the market range from none to one and a half months (prorated) on new 12-month leases.

When Transactions Return As in the rest of the country, transaction velocity in Rhode Island's multifamily market was slow from 2008 to 2010, with credit availability diminished. But the state has seen three transactions in excess of $5 million in the past six months. These three sales include the 120-unit Pocasset Village, which sold for $9.5 million last December; the 233-unit 903 Residences, which fetched $24.3 million in April; and the 132-unit Kingston Gardens, which traded for $9.3 million in May.

Also like other markets, Rhode Island has seen a precipitous drop in cap rates, with current Class A transactions trading in the low– to mid–6 percent range. Class B transactions, meanwhile, are trading in the high–6 percent to low–7 percent range.

Local and regional operators, some with institutional joint-venture partners, have purchased most of the properties in the market.

Many of the institutions, however, have not jumped back into Rhode Island on a direct investment basis and instead have focused their investment dollars on more primary metro markets, such as Boston.

Still, as the Rhode Island market continues to improve and cap rates for Class A transactions in the Boston metro hover around 5 percent, we anticipate that institutions will move back into the Rhode Island market in search of higher yields.

Eying the Future

This positive momentum is likely to continue unabated, thanks to Rhode Island's economy and infrastructure. The state is strategically located to draw highly educated workers from southern New England. In fact, almost two-thirds of New England's population lives within 75 miles of Providence.

The economy in Providence, and of greater Rhode Island, is well diversified and has evolved away from a manufacturing base to a more service-oriented market. Today, a diverse base of financial services, health/medical, education, and biotechnology drives the local employment market. With large-scale employers such as Fidelity Investments, St. Joseph's Hospital, and Citizen's Bank, the local economy is poised to rebound as the national economy improves. What's more, the state enjoys a topsix ranking in many R&D indicators, placing it among some of the leading states in the country in attracting research investment.

As the area's improving job market drives demand, the lack of new supply should help press vacancy rates down while rents begin to surge this year. Indeed, while the state may be the smallest in the nation, the opportunities for multifamily owners here are huge.

Biria St. John and Simon Butler are executive directors and Michael Byrne is an associate with Cushman & Wakefield's Boston office.