Reed Weinberg: National investors ‘beating down the door’ to enter Louisville’s hot apartment market
(Editor’s note: This article was first posted on the Southeast Real Estate Business website. It is reposted here with the permission of the author.)
By Reed Weinberg, PRG Investments
Louisville has blossomed into one of the more favorable secondary markets for multifamily investment in the United States.
The combination of promising fundamentals with factors unique to Louisville make the “Derby City” appealing. The strong apartment market is providing excellent returns for current owners and driving a red-hot sales and development market.
While there are plenty of scars throughout all industries from the Great Recession, Louisville has fared fairly well when compared to others.The Louisville metropolitan area has been able to maintain strong employment centers that have even expanded in recent years.
Ford has invested millions of dollars into two local assembly plants, General Electric has a large (appliance park) and the city serves as a hub for UPS at the local airport.
The market has recently become home to fulfillment facilities for such giants as Amazon, Zappos and many other retailers.
The central location of Louisville has helped it build and maintain a strong industrial and manufacturing market as well.
White-collar jobs remain prevalent, with global corporations such as YUM! Brands and Humana maintaining headquarters in our city.
Louisville’s 3 percent job growth from March 2012 to March 2013 is double the national rate.
All of this results in bringing new jobs and keeping current ones here, and also, of course, plenty of people looking to rent apartments.
These positive economic factors have led to an overall occupancy rate in Louisville that is north of 96 percent for complexes less than 20 years old. Older properties are also seeing strong occupancy rates north of 90 percent.
Beginning in 2012, the rental market began to experience tremendous rent growth. By the end of 2012, we saw percentage increases in rental rates that rivaled the coastal markets that traditionally see these types of sizable jumps.
In the past two years, Louisville has become a focal point for multifamily investors from across the country. From REITs to boutique firms, investors have been beating down the doors to enter the market. The strongest price-per-unit and lowest cap rates have been posted in the suburban, Class A sector.
Because of the interest, these sorts of properties are trading at pre-recession levels. Starting in May 2011 through the present, Steadfast Income REIT, based in Irvine, Calif., has invested more than $44 million in the market, and Baltimore-based Continental Realty Advisors spent more than $160 million to buy more than 1,500 units. These transactions have ranged from $65,000 per-unit to the $100,000-per-unit range.
While the number of available Class A deals has dwindled due to the recent buying spree, the hot market has even started to trickle down to Class B assets, some of which have traded above $60,000 per-unit. These assets require some rehabilitation to make them more competitive.
One recent success story is Mallgate Apartments. This 540-unit complex on the East End of Louisville was an older, tired asset that was purchased by Shamrock Multifamily Management, based in Los Angeles.
After investing upwards of $3 million in the property, the occupancy shot above 95 percent, and rents are rising dramatically. Mallgate’s owners attribute the success to strong job growth in the market.
While the larger institutional dollars are chasing Class A and B assets, the market for Class C apartments is healthy as well. These deals, of course, are a different animal. Local and out-of-state buyers are seeking value-add opportunities through these sorts of properties.
The recession left many under-managed properties with major deferred maintenance, and there are still deals trading that are either bank-owned or distressed. Most of these are located in the blue collar South End of Louisville.
One example of a larger deal is Yorktown Apartments, a 362-unit, bank-owned complex that sold for $12,000 per-unit and is getting a major facelift with a $5.6 million investment.
The bottom line is that buyers see the growing local economy as an asset for workforce housing in Louisville. One of the main factors driving interest in a secondary market like Louisville is the returns owners can achieve, especially when compared with the larger markets.
For example, buyers in the tri-state area seek deals in Louisville because a cap rate in the 6.5 percent range for Class A or 9 percent for Class C far surpasses the yields they see in their markets. So, while some of these pre-recession price points seem awfully strong to local buyers, they are quite attractive to the players in the gateway markets.
There has also been a burst of new construction, with at least 21 new complexes under construction or announced. Most of these deals are located in the higher income East End area. The high occupancy rates and demand are certainly fueling the development pipeline.
These complexes will offer luxurious amenities to today’s demanding renter.
An example is Columbus, Ohio-based Lifestyle Communities, which has announced a 650-unit complex that plans to offer “experiential” living with such amenities as a full-service restaurant and a professional, full-service fitness center.
Will we experience over-building in the market? Time will tell.
But so far, the fundamentals seem to speak to the need for more units to absorb. We all know that many of the big wagers in Louisville occur at Churchill Downs. As of late, many of the big bets seem to be on multifamily housing.
Given the continuously improving fundamentals and steadiness of the local economy, those bets appear to have pretty solid odds of offering a sound investment.
About Reed Weinberg: Reed Weinberg is president of PRG Investments, a Louisville-based commercial and investment real estate firm.