Connecticut’s Gold Coast has been tarnished by the current economic downturn, but developers aren’t giving up on this Northeast gem.
One of the biggest challenges facing the region: Mounting job losses are expected to have a moderate impact on the southwestern Connecticut apartment market this year, although rental demand will persevere as the region’s renter population remains locked in by high home prices. However, southwestern Connecticut’s concentration of financial services and office-dependent companies will hamper the ability of Greenwich to recover from the current economic downturn quickly, which could negatively impact the local Class A rental market. Regionally, total layoffs will accelerate in 2009 as 20,000 jobs are forecast to be cut throughout the Bridgeport-Stamford-Norwalk metropolitan statistical area. As of May, approximately 6,000 jobs already have been trimmed.
There is, however, good news for both the employment and apartment markets as a number of renter-supporting sectors are forecast to expand or hold firm this year. The education and health services sectors added just under 1,000 jobs in the first quarter, with further gains expected through year-end. The leisure and hospitality employers, as well as information firms, are forecast to keep layoffs to a minimum this year. All of these industries are key supporters of the apartment rental pool, as many of the positions are at pay scales which preclude home-ownership, especially given Greenwich’s high cost of housing.
Still, the Greenwich area is having a tough time filling rental units. Proximity to New York and its struggling employment market underpins climbing vacancy throughout Fairfield County, with rates soaring 200 basis points to 6.9 percent this year. As such, after falling 0.6 percent in the first quarter, asking rents are expected to finish the year down an additional 3.6 percent at $1,744 per month. The Greenwich area will also record increased vacancy, with rates jumping 180 basis points to 5.2 percent, the highest level recorded in seven years but still respectable compared to the metro and East Coast averages. In fact, local occupancies remain among the tightest in the state. Nonetheless, trivial rent cuts will persist in the market, and after trimming rental rates 0.5 percent last year, owners are expected to prune less than 1 percent from asking rents in 2009, with the area average finishing the year at $2,058 per month.
Although owners are forecast to increase rental concessions slightly, fundamentals will remain the strongest in the region. Vacancy and rental rates will receive a much-needed assist from reduced development levels this year. While elevated land and construction costs have historically insulated the metro areas from overbuilding, developers are also responding to local economic uncertainty by slowing apartment deliveries in 2009. After the delivery of approximately 500 units metro-wide in 2008, less than 300 units are expected to come on line in neighboring areas this year, an increase in inventory of less than 1 percent. While no competitive rental units are scheduled for the Greenwich area this year, approximately 40 for-sale condominiums remain in the planning pipeline, although a scheduled start date has yet to be reported.
Units shouldn’t be vacant for too long. Short- and long-term demographic trends bode well for the local rental market. Population and household growth are expected to continue through 2013, albeit with each at less than 1 percent total for the period. More importantly, the prime renter cohort of 18- to 34-year-olds, those who are typically unable or unwilling to buy a home, is forecast to expand by almost 10 percent.
Home affordability will also remain an issue for much of the local population. At a median cost of around $1 million, the home prices in Greenwich remain beyond the reach of the majority of local residents. The local median household income is fairly high at $118,000 per year, and 48 percent of the population earns in excess of $150,000 annually, but the yearly income needed to qualify for a median-priced home in the city is $260,000. Interestingly, 44 percent of Greenwich households earn less than $100,000 annually, thus making rental housing the only viable option for many of the local residents. Correspondingly, more than 40 percent of all households in Greenwich are renters.
Slow but Steady Sales
Investors looking to the region are increasingly faced with a shortage of quality for-sale product, but regional sales persist. While velocity in Greenwich proper has been limited, sales activity for the immediate vicinity has increased respectably each of the past three years, thanks in part to solid fundamentals and positive near- and long-term economic prospects. Last year, deal volume rose a solid 50 percent from the previous year. This is quite robust compared to an East Coast average dive of more than 50 percent and a U.S. average drop of approximately 40 percent for the same period. Regional per- unit prices in Fairfield County ended 2008 at an average of approximately $533,000, while Greenwich reported an average per- unit price for ’08 of $774,000 with 267 units trading, on par with the previous year. Cap rates finished the year hovering in the low- to mid-7 percent range.
Preliminary data suggests that sales activity appears to be receding further this year as recessionary stresses have kept many buyers and sellers on the sidelines, while a lack of capital from national lenders has exacerbated the problem. Limited transaction activity in the first quarter of 2009 has made analyzing trends slightly more problematic. However, a few smaller deals have been reported as closed, and a handful are in the pipeline with anticipated closing between the third and fourth quarters. As of July, median per-unit prices are down roughly 15 percent, while cap rates have bumped up into the mid- to upper-7 percent range. Nonetheless, demand for assets with reasonable cash flow expectations persists, as do opportunities for these properties. Buyers of assets worth between $3 and $15 million might consider looking to nearby regional banks in Connecticut and New York for financing needs, as funds are available with spreads below that of most national lenders.
In spite of the current economy, multi-family properties in Greenwich and the surrounding areas remain a preferred investment vehicle for both private and institutional investors. The assets continue to deliver stable returns with solid fundamentals in a supply-constrained market.
Median Age: 43.5
Median Household Income: $117,953
Average Rent: $2,080
Unemployment: 6% (as of June)
Notable: Connecticut is home to the oldest U.S. newspaper still published, The Hartford Courant, established in 1764.
* 2009 Q1 figures