Indianapolis – After suffering from prolonged weakness, this city’s multifamily market is finally starting to perk up, and out-of-state investors are flocking to the region to get in on the recovery.
Investment activity in 2006 may break records, with more than $300 million worth of apartment assets expected to change hands, according to George Tikijian, principal of Tikijian Associates Multihousing Investment Advisors, based in Indianapolis. Roughly $230 million of apartment deals closed in the area last year, about the same as in 2004.
“Over the past 12 months, interest has been very strong, and the pricing is the most aggressive it’s ever been,” Tikijian said. “We’re seeing a lot of investors from the East and West Coast come to Indianapolis because it’s cheaper than other markets, and it’s not as picked over.”
Market shakes concessions
Like most Midwest cities, Indianapolis doesn’t experience dramatic highs and lows in its economy, instead showing pretty steady – if unspectacular – job and population growth, pointed out Alexandra Jackiw, president of Buckingham Management, LLC, an Indianapolis-based firm that manages 23 properties totaling slightly more than 6,000 units in its hometown.
The metro area, which consists of a 10-county region in central Indiana that houses 1.6 million people, never lost jobs during the most recent downturn, but employment growth over the past five years has been negligible. In 2005, Indianapolis experienced job growth of 1.2 percent, according to the Indiana Department of Workforce Development. The population grew at about the same rate.
The sluggish job and population growth, coupled with the loss of both high- and mid-income renters to home ownership (the median home price is $130,000 with starter homes priced at $80,000), pushed Indianapolis apartment occupancy down into the high 80 percent range earlier this decade.
“Over the last five years, we’ve had a very flat rental market because of the economy and the relentless pressure from single-family housing,” said Tikijian. “Now, with home purchases slowing down and a better economy, we’re seeing some improvement in the apartment market with the concessions declining. We’re actually starting to see rent growth, which had been negative from 2000 to 2004.”
Concessions have been a big part of the market, said Jill Herron, vice president of property and asset management for Flaherty & Collins, an Indianapolis-based firm that manages about 6,000 units in central Indiana. “There were some crazy things out there, like $1,500 off or three months free rent,” she noted. In some cases, concessions sliced effective rents by 10 percent or more.
On a marketwide basis, effective rents have remained below 2001’s effective rates, according to Debbie Corson, a principal with Apartment Realty Advisors (ARA) who covers the Indiana multifamily market from her Cleveland office. In March, nearly 70 percent of apartment properties were offering concessions. For example, the average market rent in the Northwest submarket is $622 per month, but the effective rental rate is $584 per month, a concession difference of 6.1 percent, according to ARA’s semi-annual market report.
“Because our properties are mostly higher-end, our occupancy was blasted by homeownership,” said Mark Juleen, vice president and director of marketing for J.C. Hart Co., Inc. The Indianapolis-based firm owns or manages 2,700 units locally. “But we’ve kind of turned the corner this year.”
J.C. Hart previously offered four to six weeks of free rent on a 13-month lease but has managed to cut its concession to one month free or $400 off the first month’s rent even as the firm pushed occupancy to more than 90 percent, said Juleen. “We’ve seen a little bit more demand, and our turnover wasn’t as bad during the first quarter,” he noted, adding that the company had been suffering from 80 percent turnover and now boasts a 60 percent turnover in tenants.
Similarly, Buckingham has rid itself of most concessions and is now offering only $25 off per month on less popular units. “We’re definitely at the beginning of a recovery because we’re starting to see occupancies firm up and we’re not having to concession as heavily to get people to move in,” said Jackiw, pointing out that the company is now able to raise rents in select complexes 1 percent to 2 percent.
Across Indianapolis, which has about 110,000 rental units, the occupancy rate has increased from 88 percent last March to 89.1 percent in March 2006, according to ARA.
A skinnier construction pipeline also is helping the apartment market to get back on its feet. Since 2000, Indianapolis has added more than 2,000 units annually, according to Tikijian. About 1,600 units are under construction currently – most of them either in downtown Indianapolis or in outer suburbs.
J.C. Hart, for example, is nearing completion on Stonebridge, a 197-unit, Class A complex on the south side, which is becoming popular with renters because it offers a quicker commute to downtown than other submarkets. Additionally, the firm is getting ready to break ground on The Waverley, a 169-unit, Class A rental property in downtown. “There’s been a lot of condo development in downtown, but we’ll be the first brand new apartment construction in about 10 years,” Juleen said.
Flaherty & Collins is also developing projects selectively. The company is currently building Central Park, a 264-unit luxury community in the Plainfield submarket near the Metropolis, an upscale lifestyle center development. “The development that is going on now is more niche-driven than indiscriminate building,” Herron said. The property, which consists of carriage house townhomes and apartments, has been well received and is leasing fairly quickly with rents of about 80 cents per square foot, she added.
Future upside calls to investors
Rising demand and limited construction are music to any investor’s ears. “More properties [have] trade[d] hands in the past two years than I’ve seen in my 20 years in the business,” said Scott Pollom, a senior vice president in Colliers Turley Martin Tucker’s Indianapolis office. He expects to close seven or eight transactions this year, up from the four or five he usually closes.
Most buyers are out-of-market investors, according to Dan Mallon, vice president of CBRE | Melody in Indianapolis. “Four or five years ago, it would be hard to say that we had more than a handful of buyers – and most of them were local,” he said. “Today, they’re coming from out of state and sometimes from outside of the country.”
However, Indianapolis has lost most of its institutional ownership. In the past two years, AIMCO sold a portfolio of five properties, and Amli Residential Properties is in the process of exiting the market. The REIT, which is being taken private by Morgan Stanley for $2 billion, put all eight properties totaling 2,800 units on the market. Marketed by Tikijian, the properties are selling at $92,000 to $108,000 per unit and at 5.75 percent cap rates.
Two of the properties – Amli at Lake Clearwater and Amli at Castle Creek – have already sold to Louisville, Ky.-based NTS Realty Holdings LP for $50 million. A third property, Amli at Old Town Carmel, sold to locally based Barrett & Stokely. Four more Amli properties are scheduled to close in June, according to Tikijian, for a total of $121 million. Local players say the portfolio received 18 offers.
Across the market, cap rates have come down, and Class A properties are now trading in the 6 percent range. Class B and Class C communities are moving at 7 percent and 8 percent, respectively, according to Real Capital Analytics Inc., a New York-based research firm. The average price per unit is $66,407, the firm reports.
Pollom expects the seller’s market in Indianapolis to continue into 2007. “People are buying at the precisely right time – the sun is shining and the sky is blue,” he said.
Experts expect that apartment occupancy will reach 90 percent by the end of the year and move closer to 92 percent in 2007. Rental rates are forecast to grow 1.5 percent this year and 2 percent to 3 percent in 2007.
“I expect us to hit some a higher occupancy and raise rents,” Jackiw said. “I am getting kind of bullish about Indianapolis, and I haven’t said that for quite a few years.”