Apartment Investors Like Raleigh’s Strong Performance

In a recent buy, pricing for one of Raleigh’s premier apartment properties hit a reported record of about $200,000 a door. That move is part of a pattern emerging across the country. There’s increasing acquisition interest in top-tier communities in a variety of markets, after lots of capital chasing relatively few assets drove up pricing so much in the so-called Sexy Six locales – New York, Boston, the Washington, DC area, Los Angeles, San Francisco/San Jose and Seattle.

Looking beyond the Sexy Six, buy targets mentioned very frequently include Denver, Austin and Raleigh, which are performing very well right now and offer quite attractive economic prospects and renter demographics moving forward.

The current occupancy rate for apartments in Raleigh/Durham is 94.9 percent, up 1.4 percentage points over the past year and nearly 5 points since bottoming at 91 percent in the middle of 2009.

Effective rents for new leases in the Triangle shot up 1.6 percent during the initial three months of 2012, pushing the pace of annual rent growth to 5.2 percent. Strong annual rent increases occurred in every product sector and almost every neighborhood. Compared to the rents seen pre-recession in late 2007, effective rents for new leases have jumped just a hair under 4 percent.

Can Raleigh’s apartment sector sustain its current momentum? MPF Research anticipates solid revenue increases moving ahead, but investors should be aware that the growth pace probably is nearing its peak for the cycle.

That mainly reflects that this is a metro that developers really like for its building opportunities. Ongoing construction is already right at 4,000 units, translating to a fairly aggressive inventory expansion rate of 3.3 percent during the near term. And considerable additional product beyond what’s underway now is in the planning pipeline. That new supply looks absorbable in the big picture, but there will be periods – likely starting in the last half of 2013 – when the volume of product in initial lease-up in select neighborhoods could briefly push occupancy downward and dampen the ability to push rents.

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