WHILE THE HUNTSVILLE, Ala., market has weakened and slowed over the past year, it is in better condition than many similarly-sized markets in the nation.

Rents trended down and concessions increased in 2009, but the apartment market is banking on the military's Base Realignment and Closure (BRAC) initiative. In north Alabama, BRAC has added roughly 2,100 jobs, with 8,000 to 15,000 new jobs expected in the next three years. Government and contractor positions will cause growth in every sector of the region's economy and will be filled largely by recent grads, a demographic that tends to rent.

What's more, Huntsville is one of the strongest communities in the nation. Forbes and Kiplinger's recently recognized the city as one of the best places to live, and the Milken Institute consistently ranks it as one of the nation's best performing MSAs. “We've been impacted by the recession, but we have a silver lining,” says Rick Davis, director of Cummings Research Park for Huntsville/Madison Chamber of Commerce. “We're in growth mode to accommodate BRAC, and the future looks good.”

Still, the BRAC announcement has been tempered by recent boom-bust economics, which keeps fundamentals on the seesaw.

Pipeline Overflows

For the past 15 years, David Wilson with Birmingham, Ala.-based Rock Apartment Advisors has surveyed the Huntsville apartment market. According to his mid-year 2009 report, occupancy is 91.3 percent, and rents for Class A properties are down 2.5 percent from the previous year. Of these complexes, nearly half (49 percent) offer rent concessions. “There is definitely an oversupply of new product here,” Wilson says. “But it will correct in 2010 with the growth from BRAC.”

Wilson reports that, before the recession took hold, 4,107 units (14 projects) were in the pipeline, plus a 400-bed student complex being built for the University of Alabama-Huntsville slated to be complete in August 2010. Of those units, 300 were delivered in 2009. Plus, five deals (1,270 units) are coming out of the ground and in lease-up now, and another 640 units are in due diligence. Land for 2,000 more units is held in inventory for future need.

Most of the new multifamily construction is happening in west Huntsville, which has caused increased concessions in this traditionally-strong community. The southeast submarket is the most stable and is reflecting above-average rent growth. Madison, Ala., follows as the second-best performing market in greater Huntsville.

Class C Buying Frenzy

Once BRAC was made public, investors and developers worldwide targeted Huntsville as an emerging market. Intensified by the real estate boom, the buying frenzy caused local units to trade well-above historical prices in the small Class C market.

Between 2002 and 2006, the average asking price for a Class C unit rose from $23,000 per door to $38,000 per door. Average effective monthly rents rose from $0.45 per square foot to $0.61 per square foot, according to Jim Packard, president of Huntsville-based Eagles Management Co.

Today is a different story. “Per-door prices have fallen,” Packard says. “Gone are the days when a seller could secure financing by backing into cash flow with creative numbers and a growth forecast. [Now], buyers look for proven historical performance.”

For investors, Class A and B opportunities fluctuate between slim and none. When such product is available, prudent buyers look for cap rates ranging between 8 percent and 8.75 percent. This is about 200 basis points higher than 18 months ago. Instead, most of the market's trades have occurred in smaller Class C complexes. At year-end 2009, the MLS listed 116 Huntsville-area apartment properties for sale, only 11 of which had more than 12 units.

Banking On It

Funding sources for stabilized properties include local banks, Fannie Mae and Freddie Mac, and the FHA. Recently, the FHA financed the 136-unit Governor's House, which dry closed (without funding) in December 2008 but finally received an FHA 8 percent cap rate deal.

Huntsville lender Superior Bank will consider investors that have good local management in place and meet underwriting guidelines. Rates from banks can be as low as 6 percent interest-only or offer amortization schedules up to 25 years, depending on the property's class. Loanto- value (LTV) ranges from 80 percent for Class B assets to 85 percent for Class A assets, according to Darlina Bray, a senior vice president at Superior Bank.

Similarly, Huntsville's Bryant Bank at year-end 2009 was quoting a floating rate as low as 5 percent and would consider funding for all four-unit or larger properties with a 75 percent LTV and a debt service coverage ratio of 1.30x. “With the BRAC move mitigating layoffs, projections look good here,” says Scott Seeley, president of Bryant Bank.

NEIL VICTOR is a senior advisor and associate broker for Sperry Van Ness/Avat Realty, specializing in the sale and leasing of multifamily properties. He is a member of the National Association of Realtors, the Huntsville Board of Realtors, and the Institute of Real Estate Management.