Compared with some higher-profile markets in the Mid-Atlantic—such as Washington, D.C.; Baltimore; Philadelphia; and North Carolina's trio of Charlotte, Raleigh, and Durham—the Hampton Roads market may not immediately register at the top of everyone's list when considering where to invest. Yet, investors looking for strong market fundamentals and potentially high returns would do well to focus their attention on this growing region on the coast of southeast Virginia.
Hampton Roads, also known as the Tidewater region, comprises five counties and 10 cities that together create the Virginia Beach–Norfolk– Newport News, VA–NC MSA. Home to more than 1.9 million people, Hampton Roads is, in fact, the 36th-largest MSA in the country, the seventhlargest MSA in the Southeast, and the secondlargest MSA in Virginia. It is also where the state's largest city, Virginia Beach, can be found.
Located approximately 200 miles south of Washington, D.C., Hampton Roads has much in common with the D.C. area in terms of major employment drivers, federal spending, a focus on technology, and a highly educated workforce. Like the nation's capital, it is also a top tourist and vacation destination, with major draws such as the newly revitalized Virginia Beach oceanfront, Colonial Williamsburg, Jamestown, Busch Gardens, and many historic destinations steeped in our nation's early days.
Last year was a strong one for sales in the region, with more than $367 million in multifamily transactions trading hands. A significant portion of this activity is attributed to a 19-property portfolio sold to several groups on behalf of a major owner in the market.
The vast majority of the properties sold in 2011 were Class B and C assets built in the 1960s and 1970s, with only a handful of new product trading. The average size of each property was 254 units, and the average price per transaction was $16.7 million, or $65,000 per unit.
This year should be another strong period for sales activity in Hampton Roads. The year kicked off with a few Class A sales representing $121.6 million in transactions. For those that have closed so far in 2012, the average per-unit price of $152,000 is strong compared with other markets in the Southeast, primarily due to the significant premium in rents being achieved. In addition, currently 20-plus properties are on the market, most built before 1990, setting up another strong transaction year.
Prior to the early 2000s, Hampton Roads was dominated by local and regional players, many of whom were long-term owners. Around 2002, however, the area began to attract major developers and institutional capital because of its strong fundamentals and proximity to other major markets in the Mid-Atlantic. Groups such as Wood Partners, Oxford Development, Bristol Development, ING, BlackRock, Archon, and others have found great success buying, developing, and selling assets in the market, with excellent returns.
Hampton Roads has been a top performer in vacancy and rent growth over the past 10 years. Due to favorable demographics and a relatively small pipeline of new construction, the area is poised to experience solid rent growth and low vacancy in the next four years, as well.
As in many markets across the country, 2008 and 2009 were fairly flat for the area. Even so, effective-rent growth has averaged 3.3 percent annually since 2005. The first quarter of 2012 witnessed a 1.2 percent rent bump across the region, and effective rents are projected to grow 4.7 percent by the end of the year. Future projections show Hampton Roads continuing down this same path, with an annual average effective-rent growth rate of 3.4 percent through 2016.
The apartment market comprises 90,621 units across 14 submarkets, according to Charlotte, N.C.–based market research firm Real Data. Currently, 2,139 units are under construction, with another 2,538 units proposed. Of those units under construction, 671 are in Chesapeake, which has averaged a vacancy rate below 4.3 percent for the past six quarters and ranks second only to Virginia Beach–Central in highest average rent, at $1,041, among Hampton's submarkets.
The region's vacancy rate as a whole has averaged 5 percent over the past five years. Given the economic events of this period, it's impressive to note that vacancy across all property types has never climbed above 6.7 percent (the Class A average in the second quarter of 2010).
Completions in 2012 are expected to total 737 units, while absorption is anticipated to exceed 1,100, according to New York–based market research firm Reis. As a result, vacancy should dip even lower as Hampton Roads sees more renters than its supply can house over the remainder of the year. Projections through 2016 indicate the same trend: consistently low vacancy that's expected to average 4 percent while completions and absorption remain relatively even.
In the Navy
The Hampton Roads economy is anchored by several major sectors that continually attract people to this growing region, including the military, technology, medicine, engineering, warehousing, and distribution. Tidewater ranks among the top metro areas for federal spending, which insulated the local economy while the rest of the nation experienced the recent economic recession.
The area's naval presence is especially impressive. The market houses Naval Station Norfolk, the largest naval base in the world; Naval Air Station Oceana, the master jet base for the U.S. Navy; and Naval Amphibious Base Little Creek, the primary training and deployment base for the U.S. Navy Seals.
The Port of Virginia is the only deepwater port on the East Coast and is the most technologically advanced port in the world, capable of handling supertankers and cargo vessels from around the globe. Due to its central location, the Port of Virginia acts as a domestic and international gateway for distribution and is the primary cornerstone of the state's economic success, producing more than $41 billion worth of economic activity and 350,000 jobs throughout Virginia.
Further strengthening its case as a good job market, the Hampton Roads MSA has consistently outperformed the nation in terms of employment. In May 2012, the area was home to 798,595 jobs and had an unemployment level of 6.3 percent, down from 6.7 percent in May 2011, according to the Bureau of Labor Statistics. Those figures compare with national unemployment averages of 7.9 percent and 8.7 percent, respectively.
Tidewater's workforce isn't only varied, it's highly educated, as well. In fact, Hampton Roads is second only to Silicon Valley in its per capita concentration of scientists and engineers. Greater than 60 percent of the population over the age of 25 has earned college credit, and nearly 10 percent have achieved a master's degree or higher. Langley Research Center and Jefferson Labs, both locally based, are literally filled with rocket scientists doing advanced research and testing for military and civilian agencies.
With the MSA's booming technology and distribution industries, the region is expected to continue to attract more people, directly benefitting the area's apartment market. Specifically, the population is projected to rise 2.7 percent by 2017, to nearly 2 million people, according to Nielsen.
Traditionally a high barrier-to-entry market and with very favorable demographics, Hampton Roads' multifamily future looks very bright.
Mike Marshall is a founding principal of ARA Mid- Atlantic, based in McLean, Va.