Investor interest in Raleigh-Durham continues to heat up, as the area cements its reign as one of the hottest secondary markets in the nation.

The cap rate compression in primary markets has fully trickled down to less densely populated areas like the “Research Triangle,” the tech-heavy region anchored by North Carolina State University, Duke University, UNC-Chapel Hill, and the cities of Raleigh, Durham, and Chapel Hill.

Since the beginning of the year, at least five multifamily sales in Raleigh-Durham registered cap rates of 6 percent or less. “It’s amazing that we’re seeing cap rates in the low-5 percent range again,” says Dan Fasulo, managing director of New York-based market research firm Real Capital Analytics.

But investors active in the market aren’t quite as amazed by the swift rebound in values. A combination of rapidly improving fundamentals and very low-cost debt is helping to make those low cap rates pencil out in Raleigh-Durham.

“Although we are almost at peak 2007 cap rate levels, we are below long-term rent trends,” says John Tomlinson, CFO of Greensboro, N.C.-based Bell Partners. “We can still buy accretively and have a lot of cash flow upside given strengthening fundamentals and low interest rates.”

Bidding Wars
Bell knows the market well, with a stake in about 6,800 units throughout the greater Raleigh market. In April, the company purchased the 284-unit Autumn River Apartments through a joint venture with TRECAP Partners. The JV paid $27 million for the 13-building property in Raleigh, at a 6 percent cap rate.

But there have certainly been more aggressive trades this year. In July, Chicago-based Pearlmark Real Estate Partners (formerly Transwestern Investment Co.) bought the 432-unit Perry Point in North Raleigh from Charleston, S.C.-based Greystar. Pearlmark paid about $50.1 million for the newly constructed community, at a cap rate of 5.2 percent. A month earlier, Richmond, Va.-based GrayCo Management purchased the 233-unit Woodfield Glen apartments in North Raleigh for $28.5 million, or $122,318 a door—a cap rate of 5.2 percent.

Institutional interest in the market is picking up, as well. Milwaukee-based Northwestern Mutual acquired the 129-unit Cosgrove Hill apartments in Chapel Hill for $24.5 million, or $189,922 a door, in the first quarter. And ING Clarion Partners paid $19.9 million for The Warehouse, a 55-unit student housing property within walking distance of UNC-Chapel Hill, earlier this year. The transaction works out to more than $361,000 per unit (or $92,500 a bed).

In another sign of the valuation upswing, Jacksonville, Fla.-based Heritage Capital Group paid $51.5 million for a portfolio of two communities in Raleigh and one in Cary, N.C. The price was $7.5 million more than what the seller, Airmont, N.Y.-based The Embassy Group, paid for the properties just a couple of years ago.

Simultaneously, development activity is heating up. This month, Charlotte, N.C.-based Crescent Resources broke ground on the Gallery at Cameron Village, a 282-unit Class A building within walking distance of North Carolina State University, and 2 miles from downtown Raleigh.

And while Alliance Residential has never built or acquired in Raleigh-Durham, the company hopes to break into the region over the next year. “Our research indicates that the fundamentals are pretty strong there, and Raleigh-Durham really fits our growth market profile,” says Jay Hiemenz, CFO of Phoenix-based Alliance. “On the blocks right now is development, but we would potentially do acquisitions in the longer term as well.”

Booming Fundamentals
The region’s tech-heavy job market includes large employers such as IBM and Cisco Systems, and it’s also emerged as a hotbed of life science companies, including GlaxoSmithKline and Merck & Co., among others. The area is expected to see employment growth of 3.1 percent this year, and further growth hovering near 3 percent out to 2014.

In fact, even throughout the recession, the area never stopped adding population. The Raleigh-Durham metro has added a staggering 200,000 residents since 2006—or 12 percent of its current total, averaging about 40,000 new residents every year for the last five years. In 2006, nearly 576,000 households called Raleigh-Durham home. Today, that figure has reached about 655,000—a gain of 79,000 households in half a decade, according to New York-based market research firm Reis.

The vacancy rate reached a recession high of 8.7 percent in 2009, but has dropped steadily since. Today, the metro area’s vacancy rate is just 5.8 percent, and is expected to drop another 30 basis points by the end of the year.

Meanwhile, rent growth has also returned to the market with a vengeance. In 2009, effective rents dipped by 1 percent, but this year, rent growth of nearly 5 percent is forecasted, followed by four more years of 4 percent or greater growth, according to Reis.