In a multifamily market typically known for its conservative "hold" strategy, many Salt Lake City apartment owners are taking a new look at the upside potential of their properties. Based on their observations, they're deciding to sell or exchange before fundamentals shift and developers emerge from hibernation to build apartments once more.
Compared to other metropolitan areas of similar size, transaction volume in Salt Lake City has always been low. According to Real Capital Analytics, for the previous 12 months ending August 2005, total multifamily sales volume for Salt Lake City was just $197 million, compared to $3 billion for Phoenix and $807 million for Denver.
In Salt Lake City, many owners buy for the long term, and most of the area's largest multifamily developers build properties with the same goal. Since the 1980s, approximately 10,000 units–mostly Class A–have been delivered to the market by leading local multifamily developers. Virtually all still remain in their original developer's portfolio.
Still, increased transaction activity among the more return-oriented Class B and C multifamily owners have boosted transaction volume in properties priced above $5 million from four complexes sold in 2004 to nine complexes sold as of the third quarter in 2005. Corresponding sale prices in 2005 have also increased. In August, for example, a 2002-built property in the popular Draper area, south of Salt Lake City, closed for more than $95,000 per unit. Similarly, a Class A, 1996-built property in the Fort Union area closed for more than $106,000 per unit in December 2004.
Across its multifamily market, Salt Lake City is reporting improved fundamentals. Although vacancy rates are up from the 3 percent and 4 percent levels of the late 1990s, Salt Lake County has rebounded from its higher averages over the past few years. Just three years ago, the overall Salt Lake County vacancy rate hit 10.9 percent; that number fell to 9.9 percent in 2003 and 8.3 percent in 2004. As of mid-year 2005, overall vacancy had improved to 7.3 percent.
The rise in occupancy coincides with increases in new home prices. According to the Salt Lake Board of Realtors, the median sale price for a Salt Lake County home reached $189,500 in the third quarter 2005. Totaling a 12.8 percent rise from the same time period in 2004, this represents one of the largest increases in years. For those who were on the cusp of homeownership, the shift tips the financial equation in favor of the rental lifestyle. If home prices continue to rise at a steady pace, the result likely will lead to even greater occupancy for local multifamily properties.
These indicators offer hope that years of painful concessions will soon end, and apartment owners will be able to raise rents. So far this year, Salt Lake County rents have reached a two-year high at $636 per month, though the growth is negligible when compared to the average $632 per month in 2004 and $633 per month in 2003. Nonetheless, projections indicate the market will experience a 3 percent to 5 percent rent growth well into 2006 if all local economic signs remain on a positive track.