HEARTLAND SNAPSHOT, JULY 2004

CINCINNATI MULTIFAMILY MARKET

The Cincinnati apartment market will stabilize in 2004 as the region posts its second straight year of job growth, adding almost 12,000 jobs. Vacancy, which has increased significantly during the past 5 years, is forecast to steady this year as newly employed workers slowly fill available units. Last year, sales velocity dropped to its lowest level since 1999 as local owners continued to focus on long-term strategies instead of short-term profits, and sellers’ pricing expectations remained above the market. Transaction velocity is forecast to pick up late this year as the gap between buyer and seller expectations narrows. In addition, outside investors will be pulled into the Cincinnati apartment market, enticed by comparatively low per-unit prices.

The Rockwood Exchange is creating more difficulty for developers than originally expected. Plans for replacing the small residential district of Norwood with new retail, office space and apartments have been put on hold, at least temporarily. As private developers proceeded to buy homes in the aging community, they ran into a small contingent of hold-outs, even though the prices offered for the homes were well above market value. The residents are now going to court to fight the development. If the city and developers win the battle, the definition of urban renewal will be significantly expanded in that private property can and will be purchased for the sake of private development. If the homeowners prevail, developers will begin to think twice before embarking on future urban redevelopment projects.

The Port of Greater Cincinnati Development Authority wants to see the Riverfront area become a diverse and friendly neighborhood district consisting of restaurants, clubs, offices, retail and apartments. The Banks development in the Over-the-Rhine neighborhood aims to do just that. Budgeted at nearly $2 billion, the Banks will offer 1,300 housing units in the Central Riverfront and Third Street areas. City planners estimate that 4,000 housing units will be needed in the downtown area during the next 10 years.

The Cincinnati economy is recovering at a modest pace and will post employment growth of 1.3 percent this year. Jobs grew by 1 percent last year, equating to approximately 10,000 positions, led primarily by growth in the wholesale trade and construction sectors. Consumer confidence in the region is climbing, although at a slower pace than the nation as a whole. Cincinnati also benefits from a pro-business environment and is on the radar screen for many companies’ expansion plans, specifically the technology sector. Nanotechnology companies are paying particular interest to the area as its engineering schools and applied-science curriculums complement small technology research efforts in medical, space and military labs.

Multifamily construction will drop by almost 60 percent this year as developers have pulled back in response to a 560 basis point jump in apartment vacancies since 1999. Only 630 units are slated for completion this year, after 1,530 units came online last year.

Vacancy rates are expected to drop in to 9.4 percent this year, a decrease of 10 basis points, due to decreased development and slight in-migration. Vacancies climbed by 150 basis points this year to a 5-year high of 9.5 percent as gains in employment and slight population growth were insufficient to counter a 20 percent increase in new development. The rapidly expanding eastern and northeastern submarkets of Blue Ash, Amberley and Montgomery continue to boast the lowest vacancy rates, averaging 5.5 percent. Vacancy rates are forecast to remain stable through the year as several employers expand in the area.

Rents will inch upward by 0.6 percent this year to $639 per month as vacancies stabilize and the initial effects of renewed job growth begin to be felt. Rental rates remained relatively flat in last year at $635 per unit as owners struggled with increasing vacancy rates in most submarkets. The most stable submarket continues to be the Northern Kentucky region, where residents typically get more for their rental dollar when compared to the Class B properties in Mason and Butler County. Asking rents in Northern Kentucky will remain unchanged this year at $650 per unit, after increasing 3 percent last year. The affluent Northeast submarket will continue to garner the highest rents this year, at $790 per unit, unchanged from 2003, while effective rents will fall slightly as newly constructed Class A properties are still employing limited concessions in their bids for tenants. Rents in the struggling western and southwestern areas remain lowest with the Southwest submarket posting the region’s lowest rent at $520 per unit, and the Highway 27/127 area reporting rents at $560 per unit. While rental rates in these areas have remained stable, owners must effectively contend with deteriorating demographics and aging properties to achieve rent growth as newer, equally affordable properties in surrounding areas are successfully luring residents away.

Prices will escalate slightly this year as the lack of for-sale inventory continues in a market where hold periods often reach 20 years or longer. However, transaction volume is expected to increase slightly as sellers ponder the effects of increasing interest rates on values. On a per-unit basis, prices remain low in Cincinnati when compared to other markets, as rising vacancy rates and poor economics have taken their toll. Last year, properties sold for a median price per unit of approximately $31,000. The median price per unit has fluctuated less than 5 percent in the past 5 years. The opportunity in the Cincinnati apartment market may depend on a buyer’s willingness to invest in upside potential by acquiring relatively high-vacancy properties at a low cost per unit. Cap rates reflect current market conditions and range from 7.75 percent for well-located Class A properties to more than 10 percent for Class C properties in westside submarkets. Well-located Class B properties will be the most popular apartment investments while a broadening of the gap between buyer and seller expectations will negatively affect transaction volume for Class C assets.

- Jonathan Lee, Marcus & Millichap

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