Columbus' job-creation tax credit is translating into healthier occupancies and rent growth.

Follow the jobs. It's a surefire tactic for apartment owners and developers looking to grow their business. In fact, the health of any apartment market depends on local job growth. And in Columbus, Ohio, owners are reaping the benefits of a jobcreation tax credit enacted by the city in 1993, but which has seen much more use in the past three years. Employers can receive refundable tax credits up to 75 percent of Ohio income taxes withheld from new full-time employees for 15 years. Last year, 13,700 positions were created metrowide, and employment growth in Columbus will exceed the national average in 2011 as local companies expand head counts by 1.7 percent, or 15,000 jobs.

The tax-credit–driven resurgence in hiring, particularly in high-paying white-collar sectors, will intensify Class A leasing activity. The professional and business services segment has registered the largest employment gains over the past 12 months, increasing by 6,000 positions. This is a sharp turnaround from the 10,800 jobs slashed in that sector during the recession.

And the tax credit should continue paying dividends. For instance, Citi Fund Services Ohio will spend $2.8 million to expand its office in the Bexley submarket, supported by the tax credit, creating hundreds of jobs through 2014. Across the board, this trend will directly benefit complexes close to major business districts, such as the Westerville submarket, where vacancy rates will drop to 250 basis points (bps) below the metro average by year's end.

In areas hardest hit by the recession, such as Grove City, suspended development activity this year will allow any increase in demand to simply tighten existing conditions. As the job market recovery spreads into blue-collar industries later this year, lower-tier complexes will report more significant improvements in vacancy. Nonetheless, vacancy in the segment will remain nearly twice the top-tier rate, delaying any substantial rent gains at Class B and C properties until 2012.

Robust Sales

Sales activity in Columbus will strengthen this year as investors move off the sidelines to acquire local properties ahead of a more robust recovery.

A growing number of investors nationwide— and in Midwest markets—are looking at Class B assets as cap rates for top-tier properties in primary locations continue to tighten. And as cap rates compress further in coastal markets, a few REITs and institutions may re-enter Columbus to obtain performing apartment assets for stable, long-term cash flow. Properties near major employment hubs will draw the most attention, supported by vacancy rates improving at a pace ahead of that in the metro.

Local investors are focusing on highvacancy properties with deferred maintenance in the suburbs, particularly the Northeast/Minerva Park and Hilliard submarkets. The median price in both areas plummeted through the recession as an influx of distressed assets hit the market. As a result, savvy investors can now acquire properties on a price-per-unit basis well below replacement costs for value-add opportunities. For instance, in the Hilliard submarket, the median price per unit over the past year was $35,820, a 32 percent drop-off from peak 2006 values. Meanwhile, in the Northeast/Minerva Park submarket, prices are around $28,472 per unit, down 23 percent from peak prices.

Apartment investment activity in the Columbus metro has increased by nearly 20 percent in the past year, as in-state buyers have re-emerged to take advantage of steep discounts on assets with deferred maintenance.

As operations stabilize in Columbus, more properties along major thoroughfares such as Interstate 270 in the Grove City submarket may be put up for sale, especially as banks show reluctance to refinance maturing loans. Qualified investors targeting large assets could find opportunities to purchase 200-unit-plus complexes at a considerable discount from peak prices.

Vacancy Dips

The Columbus metro vacancy rate dipped 20 bps in the first quarter to 8.6 percent, a 90 bps improvement from one year earlier. The Class A segment led the decline, with vacancy in top-tier properties sliding 150 bps in the past four quarters to 5 percent.

As the job market strengthens this year, vacancy will further decrease 30 bps to 8.3 percent, providing owners leverage to raise rents.

The market has seen some rent growth over the past year, as asking rents rose 0.8 percent to $664 per month, and effective rents increased 1.3 percent to $621 per month. And in the past 12 months, owners tightened concessions to an average 23 days of free rent.

This trend should accelerate in 2011, with asking rents expected to advance 1.2 percent, to $672 per month, and effective rents anticipated to rise 1.9 percent, to $633 per month, by year's end. Concessions are also expected to drop to an average of 21 days, also by the end of the year.

Columbus builders completed 610 apartment units, increasing existing stock levels by 0.5 percent, from the first quarter of 2010 to the first quarter of 2011. More than half of those units, 390, came on line in the Groveport/ Canal Winchester submarket, expanding the area's inventory by 4.8 percent.

Metrowide, more than 1,370 units are under construction, nearly 55 percent of which will come on line this year. Approximately 785 units will be added in the metro in 2011, increasing inventories by 0.6 percent. The largest project set to come on line is the 272-unit Albany Landings, which will open in the Westerville submarket during the third quarter.

Another 1,670 apartment units are in the pipeline throughout Columbus, though no groundbreaking dates have been set.

Financing Becomes Friendlier

Debt availability has increased dramatically from the trough two years ago, but the overall supply remains limited and selective.

Institutional debt sources share a preference for low-risk, higher-quality assets in toptier submarkets with strong sponsors. This mandate leaves the majority of the transaction bell curve—sales of $5 million to $20 million in the B-minus to C-minus quality range—with fewer financing options. Transactions of this type can get funding, but the process and qualifications are more challenging, with a significant focus on sponsorship.

All-in rates for smaller apartment loans from the government-sponsored enterprises (GSEs) range from 3.75 percent to 4.5 percent for five-year terms, with 10-year notes pricing 100 bps higher. Motivated life insurance companies will offer low all-in rates on top-tier assets with good credit characteristics this year. And issuance of commercial mortgagebacked securities (CMBS) will continue to rise, but the sector's latest incarnation will include new regulation, oversight of ratings agencies, and more conservative underwriting than at the peak of CMBS dominance.

For more broad-based easing in traditional lending sources to occur, the economy will need to post several consecutive quarters of solid employment growth and overall expansion. It's a good thing that type of solid employment growth is well under way in Columbus.