National Market Outlook

With occupancy on the rise, concessions shrinking and supply tightening, multifamily owners finally began to breathe a little easier in 2005. Even better news is that these improvements are expected to continue through 2006. While all markets will benefit from this slow recovery, some U.S. cities are particularly well-positioned to reap the rewards.

Capital Interest

The most powerful trend in the multifamily market today may be the spillover of capital from primary to secondary markets. Buyers in hot spots like Southern California, Washington, D.C., and Florida are selling at record-high values and record-low cap rates of 4 percent and below. They then reinvest their capital in secondary growth markets, where they can get more property for their dollar and earn higher yields with cap rates of 6 percent, 7 percent, and 8 percent. Some of the most attractive secondary markets in this category include Raleigh-Durham, N.C.; Memphis, Tenn.; Richmond, Va.; Norfolk, Va., Atlanta; Phoenix; Tucson, Ariz.; Austin, Texas; Denver; Indianapolis; Cincinnati; and St. Louis.

"This transfer of dollars to higher-cap markets is very significant," says Robert White, president of New York City-based Real Capital Analytics, a national research and consulting firm focusing exclusively on the commercial real estate investment market. "Investors moving out of low-cap, condo conversion-dominated areas are buying in markets that a few years ago they never thought they'd be in. The nation's hot new secondary markets are reaping the benefit of the spillover."

Boston ranks as one of New England's top multifamily markets.
NEW DIGS: The 420-unit, 28-story Archstone Boston Common, below, is the city's first rental, residential high-rise to be built in 20 years. Archstone-Smith expects to deliver first units in mid-2006.

Boston ranks as one of New England's top multifamily markets. NEW DIGS: The 420-unit, 28-story Archstone Boston Common, below, is the city's first rental, residential high-rise to be built in 20 years. Archstone-Smith expects to deliver first units in mid-2006.

Credit: Andrew Gunners/Getty Images

POPULAR PLACE: Property values in Phoenix are rising, thanks to an infusion of Southern California capital.Photodisc Collection/Getty Images

Migration has doubled and even tripled transaction activity in some secondary markets, despite the fact that many still have a soft economy.

Raleigh-Durham and Memphis

Money from across the nation, and particularly Florida, Washington, D.C., and New York, is finding its way to Raleigh-Durham and Memphis. In the last 12 months, just less than $600 million in properties valued at more than $5 million have closed in Raleigh-Durham. The local price-per-unit has risen consistently from the upper $50,000s in mid-2003 to an average of between $70,000 and $90,000 per unit in 2005.

Buyers from as far away as California indicate that they're choosing this market over other competing areas in the Southeast because of its affordability, quality of life and education, and diversified economy that includes the stabilizing presence of job-generating engines such as Duke University, the University of North Carolina, North Carolina State University, and the state government. In short, buyers think the area has great long-term potential even after a couple of soft years.

URBAN SUCCESS: Avalon Chrystie Place, which opened in Manhattan this year, is already more than 80 percent occupied.Sperry Van Ness

Memphis had about half the multifamily transaction activity of Raleigh-Durham in 2005, at $303 million, and the local average price per unit is in the $50,000 range. Cap rates, however, are in the mid-7 percent range, and values are trending upward, which indicates this may be a good time to consider a foray into the area.

Rent growth in Memphis has been slow due to the relatively low cost of home ownership. Annual asking rent gains should remain below 2 percent through 2006 and beyond. Effective rate gains should just stay ahead, rising to 3 percent by 2007. In the Raleigh-Durham market, asking rent gains will also be slightly lower than effective rents over the next few years as landlords focus on reducing concessions. Effective rent gains are expected to reach 4 percent by 2009.

Richmond, Norfolk, and Atlanta Investment activity is increasing in central and Tidewater Virginia and Georgia, in part because of multifamily sellers coming out of Washington. Atlanta leads the pack with $600 million in multifamily property closings in mid-2005 alone.

Atlanta cap rates in the past year have fluctuated only slightly within the 7 percent range, and the average price-per-unit is steadily moving toward the $70,000 mark. REITs in particular have noticed Atlanta, operating largely under the condo conversion craze to make up 68 percent of the market's 2005 mid- to high-rise unit purchases.

Transaction volume this year in Richmond and Norfolk is lower, in the $100 million and mid-$200 million range respectively, but their price-per-unit average has improved rapidly from $40,000 a few years ago to between $60,000 and $80,000 today, with cap rates in the 7 percent range.

Asking rents in Richmond decreased slightly by mid-2005 to $712 per month. Rental gains are expected to remain below 2 percent through the beginning of 2006 and will increase to the 2 percent level thereafter. Asking rental rates in Norfolk, on the other hand, increased by 1.4 percent during the first half of 2005 to $752 a month and will continue to rise. Rental rates are increasing slowly by less than 1 percent in Atlanta, and small upticks in year-over-year gain will follow.

Phoenix, Tucson, Austin, and Denver The impact of Southern California 1031 exchange dollars can be felt across the United States, but the impact on nearby growth markets is astounding.

Phoenix may be the primary beneficiary, with transaction volume rising from $200 million per quarter in early 2004 to $400 million by mid-2004 and $800 million per quarter today. Phoenix values have some catching up to do, but they have steadily improved to an average $60,000 per unit over the past 12 months and should continue to rise in 2006 thanks to an improving economy and a population growth that is among the fastest in the nation.

However, falling cap rates in Phoenix–from 7 percent and 8 percent in 2004 to the 6 percents today–have also directed investor attention to Tucson. This much smaller market has grown from $50 million in sales per quarter last year to around $75 million to $100 million per quarter today. Tucson apartment values also are moving toward $60,000 per unit, and cap rates are among the better in the Southwest, at more than 7 percent.

Austin also has become a key Southwestern investment market, though it achieves less than half of the transaction volume of Dallas and Houston. In the past 12 months, Austin closed $750 million in multifamily sales, with 77 percent from private investor money. Cap rates have fallen to the middle 6 percents, but price per unit is one of the best in the region–and better than Dallas and Houston–at nearly $70,000 per door.

SAN FRANCISCO TREAT: Archstone-Smith bought this downtown San Francisco property for $147.5 million last summer.Sperry Van Ness

Occupancy has spiked 3.3 percent in the past 12 months and rents are rising, but experts on the ground warn that this is a "quick cycle" market with very little time between its commercial real estate recovery and expansion periods.

Denver's current $80,000-per-unit value tops prices in the West's secondary markets. Transaction volume, however, is still unsteady at anywhere between $100 million and $200 million per quarter with a cap rate of 6.5 percent. Considering Denver's lengthy economic downturn, these fluctuations may continue as the area finds its feet. On the plus side, Denver has not yet reached its value potential. Investors have seemed to pick up on this, and the market is attracting a solid mix of private, institutional, and REIT buyers as a result.

In Denver and Austin, rental rates are climbing steadily, as they are in Phoenix and Tucson. Rents in Phoenix are expected to rise by 1.9 percent by the beginning of 2006 to $712 per month. Tucson rents will make the most significant gains during this time frame, increasing by 2.4 percent to $583 per month.

Indianapolis, Cincinnati, and St. Louis Even relatively quiet, under-the-radar markets in the Midwest are feeling a perceivable rush from low cap rate dollars. Cap rates of around 8 percent have helped close $230 million in multifamily property in Indianapolis in the last 12 months, with buyer dollars split among private investors, REITs, and institutions.

St. Louis closed $300 million over the past year, $54.4 million of which was mid- or high-rise properties. The average price per unit for Indianapolis and St. Louis has also risen from the $40,000 and $50,000 marks in 2003 and 2004 to $60,000- and $70,000-per-unit–and higher–averages today.

Like much of the Midwest, Cincinnati is slowly pulling itself out of an economic downturn in the manufacturing sector. Fortunately, the local employment market is now growing by 7,000 new jobs per year, and its population is expected to increase steadily at 5 percent annually until 2008. With just 550 to 600 new apartment units coming online in 2005, Cincinnati is a good consideration for both investor and development dollars, with hopes that the improving balance of economy and demand may improve the area's mere 1 percent rent growth.

Rental rates in Cincinnati are also rising–but just barely–at $657 per month. In Indianapolis, asking rents are almost flat, with gains of less than 1 percent in 2005. Asking rents in St. Louis average $679 and are also expected to increase slightly through 2006.