After a spate of apartment overbuilding a decade ago, Columbus is finally enjoying the kind of absorption it hasn’t seen in more than 10 years.

That constriction in supply couldn’t come at a better time. The brightest spot in the region’s economy today is an improving employment outlook. While the Columbus economy has always been bolstered by the state government and the presence of Ohio State University, other sectors—including construction, retail, and financial services—are now posting payroll gains for the first time in many quarters.

In fact, during the first quarter of 2011, the area added 14,300 new jobs, compared with 11,400 in the first quarter of 2010. Penn National Gaming’s new, $400 million casino, scheduled to open at the end of next year, is expected to create an additional 3,500 jobs during construction and 2,000 jobs once it opens. And 2012 will see between 16,500 and 18,300 new jobs added, sustaining the upward trend.

Of Ohio’s three largest cities (Columbus, Cincinnati, and Cleveland), only Columbus is posting positive population growth. Indeed, over the past 10 years, the population in Ohio’s capital city has grown nearly 11 percent. Given those numbers, and with job growth expected to continue for the next several years, apartment owners in Columbus can feel hopeful that strong demand for multifamily properties will continue.

Back in the Black

The Columbus apartment market is generally conservative. Most multifamily is located in suburbs and consists of traditional garden- or townhouse-style units in two- or three-story buildings. In the late 1990s through the early 2000s, some development of loft-style urban-living properties occurred in infill locations near the central business district, including Short North, the Arena District, and German Village, but this type of product is not a significant factor in the market.

What was a significant factor was the overbuilding that occurred during that window of time, much of it Class B product. The apartment market is still recovering from that construction frenzy, which caused a bump in vacancies, inhibited rent growth, and forced owners to give concessions that often topped 1.5 months’ rent.

Thankfully, 2011 apartment demand stats are back in the black, with 422 units absorbed during the first quarter of 2011, according to Red Capital Group—80 percent of those units absorbed were in Class B and C product. First-quarter demand in this segment was the strongest it has been in more than 10 years and is expected to remain firm as new but lower-paying jobs are created.

In addition, average occupancies are at their highest levels since 2002. Current overall market occupancy averages 93.1 percent, up from 91 percent in December 2009 and 92 percent at the end of 2010. And with many people now questioning the financial benefits of homeownership; wary of the tightening of credit standards; and facing a lack of new product since the recession began, most investors feel that vacancy rates in Columbus will continue to decline.

Typical of the Midwest, Columbus apartment rents have been fairly consistent, without major busts or booms. After mostly flatlining in 2008 and 2009, market rents (currently at $692) have increased 2.06 percent year-over-year since 2010, and effective rents ($674) have grown 3.4 percent for the same period. Research indicates that concession loss for the overall market now averages 2.6 percent, well below the discounts of almost 5 percent that were posted at the beginning of 2010. And long-term effective-rent growth is predicted to average about 2.2 percent per year for the next two years, growing to 2.7 percent in 2015.

Not surprisingly, new suburban multifamily development has been strongest in the booming northeast suburbs, where more than 1,500 units across eight properties have been developed since 2008. Ardent Property Management is a big player here, with three new properties delivered in the past three years.

Rents in the northeast suburbs average $695 per month, the second-highest in the metro area. Ardent is also active in Columbus’s high-growth southeastern sector, where the company has built three properties (784 units) since 2008. Monthly rents in the east and southeast suburbs average $614.

Development near downtown Columbus and in the northwest suburbs has also been impressive. Nationwide Insurance has been a major factor in the construction of loft and similar living spaces in urban infill areas near the central business district. These units are built to appeal to young professionals, whose demographic has grown by 45 percent over the past 10 years in this submarket.

Lifestyle Communities and Edwards Development Cos. are both active in the northwest suburbs, as well, with Edwards recently proposing its third development in the past year after taking a three- to four-year hiatus. Northwest sector rents are the highest in the area, averaging $825 per month, and have posted the largest gains (3.51 percent) over the past year.

Tops in Distressed Assets

On the sales side, while a number of properties have changed hands in Columbus, most of them are distressed. In fact, the area has been struggling with the largest number of distressed assets of any market in Ohio. While most of these distressed properties are Class C and 30 to 40 years old, some are Class B and simply suffer from overleveraging or locations in overbuilt neighborhoods.

Of the 17 investor-grade multifamily property sales that have occurred since January 2010, 15 have been REO or distressed. In that time, performing property sales have totaled $22.6 million and averaged $22,046 per unit; distressed property sales, meanwhile, have totaled $34.6 million and averaged $8,321 per unit. A multitude of other distressed assets is still in the pipeline. Investors are basing their offers on current revenue and are giving little if any value to upside potential. What’s more, distressed properties are being sold on a per-unit, rather than cap-rate, basis, since most of them have no operating income.

Despite this, there are still a number of buyers and sellers sitting on the sidelines, so there is a fair amount of pent-up demand for performing assets. Class B assets are starting to hit the market, with cap rates ranging between 7.5 percent and 8.5 percent. The buyer pool consists of mostly regional or local investment or multifamily operating companies. REITs and other large national buyers have not yet returned as buyers.

Finally, apartment development is increasing, with the number of permits issued approaching 2006 levels. Construction is under way on eight large multifamily properties, with most development centered in the northeast (762 units) and northwest (1,207 units) suburbs. Builders appear to be exercising caution, however, and apartment owners hope that new construction will not approach the levels reached in the late 1990s, when new apartment construction averaged 4,700 units per year.

Ultimately, with vacancies and cap rates falling and rents and job growth rising, Columbus has regained its appealing status on the lists of many regional and Midwest apartment investors.