It's no surprise that North Carolina's Triangle area was among the first Southeast apartment markets to rebound from the recession.
Raleigh, Durham, Chapel Hill, and a collection of 29 smaller towns and several townships together make up North Carolina's “Triangle,” a name derived from the location of the three major universities in the region—N.C. State, Duke University, and UNC–Chapel Hill.
The Triangle is also renowned for Research Triangle Park, the largest planned research park in the country and by far the most powerful economic driver for the region. With a combined population of 1.7 million, the Triangle is among the fastest-growing metropolitan areas in the country.
Given its strong educational and employment anchors, it's not surprising that the Triangle apartment market was one of the first Southeast apartment markets to rebound from the recession. In fact, the market was ranked No. 1 in mid-2010 among the 19 Southeast apartment markets covered by Charlotte-based research firm Real Data's Apartment Index.
And the fundamentals for the market continue to improve. The average occupancy rate is currently around 94 percent, the highest overall occupancy in well over a decade, and is expected to approach 96 percent this year as demand continues to outpace new supply in the near term.
The average rental rate for the Triangle market is now $825. Apartments currently in lease-up have average rents of $1,195 per month, same-store rents are up 4.4 percent in the past year, and annual rent growth could climb as high as 6 percent in 2012, according to Real Data. Truly, the Triangle area has blossomed once again.
Investor, Developer Magnet
In 2011, transaction volume returned to pre-recession levels in the Triangle. Last year, 38 apartment sales closed at a total of $860.4 million, compared with 25 sales at $527.5 million in 2010.
As in most markets, cap rates on apartment sales in the Triangle have continued to decline over the past three years. During 2011, Class A property sales closed at an average cap rate of 5.26 percent, compared with an average of 6.18 percent in 2010 and 7.05 percent in 2009. And it's not just the upscale assets that have drawn strong investor interest. Class B property sales in 2011 closed at an average cap rate of 6.72 percent, compared with 7.57 percent in 2010 and 7.86 percent in 2009.
New apartment construction, as well, declined in the area last year, with fewer than 1,300 units completed and delivered in 2011, the lowest level of new supply in many years. By contrast, the average number of new units completed each year over the past 12 years is approximately 3,000 units. Annual net absorption over this period has been approximately the same number of units. As of Dec. 31, however, 18 apartment communities comprising 4,263 units were at various stages of construction in the Triangle, most of which will be completed and released for leasing this year and in early 2013.
In the pipeline, 12 proposed projects comprising 3,298 units appear to be moving forward and are expected to break ground, boosting to 30 the total number of potential projects that conceivably could be under construction by the end of the first quarter of 2012.
In addition, Multifamily Realty Advisors is tracking another 14 potential projects with 3,308 units in the early stages of development.
For 2011, Raleigh was ranked No. 1 on Forbes' list of “Best Places for Business and Careers” and has now held that distinction in four of the past five years. Low business costs (18 percent below the national average) and a well-educated labor force make Raleigh an attractive spot for employers. In addition, the net migration rate to Raleigh has been the secondhighest in the nation in the past five years.
Employment, too, holds promise, with the Triangle's overall unemployment rate of 8 per cent well below that of the state as a whole (10.4 percent) and comparable to the nation's as-of-December 8.5 percent rate. Overall, the Triangle has everything investors and developers could want in a solid apartment market— strong population growth, a well-educated workforce, healthy job growth, and low unemployment. And this perfect storm is expected to continue in the foreseeable future.
Nonetheless, the market's improved fundamentals didn't occur without a pause in development activity over the past two years, and these conditions will continue or improve only so long as demand exceeds, or at least stays in balance with, supply. Developers are understandably attempting to make up for lost time, and, as noted above, we're likely to have more than 7,500 units under consideration in the Triangle by mid- to late 2012, with another 3,300 units gearing up behind that.
With 3,000 people moving to the Triangle area monthly, the market has demonstrated a remarkable ability to absorb new units. To the extent we have annual starts exceeding 4,000 units in the next two years, there's certainly the potential for a supply/demand imbalance to occur in the wrong direction by 2014. Looking at the pipeline right now, that's a real possibility.
Richard Cotton is managing director of Multifamily Realty Advisors, a regional commercial real estate firm with an exclusive focus on the apartment sector.