Apartments — an often overlooked part of the commercial real estate market — are showing signs of life in Connecticut and seem to be performing better than other market sectors, according to an East Hartford real estate consulting firm.
A survey published by Integra Realty Resources earlier this month shows that the multifamily industry "is currently the most stable real estate sector and is performing above expectations, with only a rate of decline of 1 percent in the past three months."
The company forecasts that the multifamily sector will fully stabilize in the next six months. It is one of the few types of commercial real estate products that continues to attract buyers amid a depressed market.
"It appears the worst is over," said Mark Bates, managing director of Integra Realty Resources in East Hartford. "We are at or near bottom and I think we'll see vacancies move down as rents stabilize. But there is still limited access to capital for financing deals."
Integra Realty Resources Inc. is the largest commercial real estate valuation and consulting firm in the U.S., with 59 offices and 850 experts nationwide. The consultancy specializes in real estate appraisals, feasibility reports and market studies.
Nearly a dozen transactions have been recorded statewide so far this year, which Bates views as a good sign for the local multifamily sector.
For example, Marconi Enterprises LLC of Hartford snapped up a 40-unit development on Clinic Drive in New Britain for $2 million — or $50,000 per unit — in February.
And the sale of two New Haven apartment buildings reflects that uptick in the multifamily sector, albeit at discounted prices.
BDTH Norton LLC, owner of the 27-unit Norton Street development in New Haven, unloaded the three-story building for $1.4 million — or $52,000 per unit — earlier this month. The selling price is about 20 to 30 percent down from what the apartment building would have fetched two years ago.
Meanwhile, Branford-based Bagley Sterling sold a 28-unit development on Orchard Street in New Haven for $1.1 million — or $39,286 per unit — in March. The three-building complex was also about 30 percent cheaper compared to what it was worth two years ago, according to Bates.
"We are not going to see rents spike for at least another 12 to 24 months and certainly not until employment goes up," said Bates. "And as far as building goes, there is almost no appetite for lenders to finance right now."
Rick Chozick, president of Chozick Realty Inc. in Hartford, sees similar signs.
"The multifamily apartment complex market in 2009 in Connecticut and the Greater Hartford region was not characterized by declining prices but rather a lack of sales volume. The majority of the apartment complex transactions that took place in the class B rental market have maintained cap rates at 8 percent and below," said Chozick.
"Activity levels starting in the second quarter of 2010 have seen a marked increase in investor activity. Chozick Realty has placed three apartment complex deals under contract in the last 60 days on properties that had been marketed during 2009. It is expected that the activity will increase through the balance of 2010 and accelerate in 2011."
Construction financing for private developers dried up in recent years as banks dealt with bad loans. Charge-offs of construction and land development loans by U.S. banks jumped 70 percent in the third quarter to $7.6 billion from the same period in 2008, according to the Federal Deposit Insurance Corp. in Washington, D.C.
Still, one company says it will break ground this year amid a downturn market.
AvalonBay Communities Inc., the second-largest publicly traded apartment owner in the U.S., plans to start $400 million of construction this year, including a project in Connecticut, according to company officials.
AvalonBay, based in Alexandria, Virginia, began projects in Massachusetts and New Jersey in the fourth quarter after a nine-month hiatus, according to published reports.
AvalonBay prefers to focus its efforts on tight markets with relatively low vacancy rates and cheaper construction prices, said company officials.
According to published reports, the company says it plans to develop some projects in New York and Connecticut. Officials did not return calls seeking information about whether those projects would break ground in or around Greater Hartford.
AvalonBay has $300 million in cash and a $1 billion credit line and develops more apartments than other publicly traded real estate investment trusts (REITs).
The company says at least seven projects will get underway this year when nationally 8 percent of apartments remain vacant — an all-time high- according to researcher Reis Inc.
In comparison, vacancy rates in Greater Hartford range between 6.5 and 7 percent.
By 2012, U.S. rents may increase by about 6.5 percent and the vacancy rate may fall below 5 percent. Job growth is expected to climb around 3 percent in the fourth quarter of 2011, compared with a 4.3 percent loss in 2009, according to economists.
The Greater Hartford area could see rents inch up slightly — but in 2012 or beyond, according to real estate experts. Rents will climb in areas like Boston — up 5 percent or more — by 2012 while nationally, that figure is more likely to be around 3 percent.
A one-bedroom apartment unit in the Hartford region fetches about $600 to $800 per month while a two-bedroom runs about $750 to $900 per month.
U.S. builders started 92,000 units in 2009, a 58 percent decline from the year before and the fewest since the government began collecting the data in 1974. As the job market recovers, demand will rise and supply will shrink, according to AvalonBay officials.