By Gladys Risma, Senior Associate for Multifamily Investments

Published in Heartland Real Estate Business – August 2007

Economic cycles produce winners and losers. While it remains to be seen how the current cycle will impact Cincinnati’s multifamily market, a number of factors point to a favorable investment climate in the multifamily market.

Home sales continue to drop throughout the nation, and, as of May, home sales in Greater Cincinnati fell less dramatically than nationally, only declining 8% locally from the previous year’s monthly total. That marked the 13^th consecutive monthly decline for the region. Nationally, home sales have dropped 10%. Average home prices in the area also dipped about 0.7% compared to 2% nationally.

Despite the price decline in home values, supply is outstripping demand, with inventory climbing as many homeowners face foreclosure and problems with sub-prime mortgages. According to the Mortgage Bankers Association, Ohio ranked first in the nation for homes in foreclosure during the year’s first quarter, with an estimated 50,000 homes in trouble or 3.4% of the nation’s foreclosures.

Credit standards have tightened against this backdrop, and average rates for 30-year mortgages increased to 6.6% in June, the highest level since last July. Coupled with rising fuel and energy costs, home ownership has become a more expensive option.

The housing market’s stuttered steps have increased demand among renters, giving landlords more pricing power both in rental rates and in limited concessions.

Activity Gains Momentum

Vacancy rates continue to decline. Two years ago, the rate stood above 9% but now hovers around 8% in the apartment market. While this is still higher than the average 6.7% in the Midwest and the national average of 6.1%, we believe the rate will drop in the coming months as renters enter the market.

Rents continue to inch up as well as landlords gain pricing power. Rents now average $676 per month, up from $670 per month in 2006 and $657 per month in 2005. Along with this, landlords have reduced concessions, down to an average of 0.5 month’s free rent, compared to 1.5 months in the past few years.

These conditions, along with a wealth of capital, provide incentives for investors looking for opportunities in real estate.

More than $100 million of multifamily product was acquired during the first half of this year. While this was off the pace of the past two years when investors purchased $370 million of properties last year and a record $420 million in 2005, many purchases occurred during the second half of the year. Additionally, interest-sensitive loans may force sales as was the case last year when banks sold four large properties at auction or through foreclosure.

Cap rates historically remain low, averaging 7.2% during the first half of 2007, according to RC Analytics. High-quality Class A properties are seeing lower cap rates in the 6–7% range while aggressive investors can command cap rates in the 8–11% range for older Class B and C properties. As in other Midwestern cities, though, Cincinnati’s returns are more attractive than in big cities on either coast. Steady population growth of 1–2% annually since 2002 and stable employment gains of 1.2% offer further protection for investments in multifamily product.

Downtown Sparks Development

On the development side, the resurgence and revitalization of the CBD market continues to draw interest from traditional multifamily developers as well as newcomers looking at condo, conversions and mixed-use projects. While developers have become more cautious and lenders more stringent in financing requirements, downtown and surrounding areas continue to be a focal point for development.

New and infill developments are aimed at two core audiences: young professionals and empty nesters who are willing to pay a premium to experience the urban lifestyle. Downtown renters pay a 20% premium in rents per square foot and occupancy is at 94%. For owner- occupied housing, the region’s average home price is $172,702 in the first quarter of 2007. By comparison, downtown condos average sales price is $201,631 with riverfront luxury condos selling upwards to $1 million.

Recent new developments are: Middle Earth Developers’ 617 Vine building. The former home of the Cincinnati Enquirer newspaper will be converted into 150 apartments and 54,000 square feet of commercial space. Eagle Realty’s Fifth and Race mixed-use project plans for 300 residential units. Gateway Quarter, in the historic Over-the-Rhine district, includes 100 condominiums. Miller-Valentine’s One River Plaza, a mixed-use development, includes 140 luxury riverfront condominiums.

These projects would complement several others completed in the first half of the year: The McAlpin Downtown (40% sold), and, in Bellevue, Harbor Greene (60% sold) and Water’s Edge (80% sold). The Ascent, a Daniel Libeskind signature building, also continues to move forward, with 54 of its 72 units sold. The long awaited Banks project, a 15-acre riverfront development book-ended by the Reds and Bengals stadiums, has reached a non-binding agreement with Carter Real Estate and Harold A. Dawson, developers from Atlanta.

All told, with 5,200 multifamily units either built, on the drawing board or in the proposal stage, the riverfront and downtown population will double by 2010.

Developers certainly face challenges moving forward as lenders tighten the reigns but the Queen City’s multifamily arena should see further efforts around the CBD’s periphery and the river in areas such as Mt. Adams, Columbia Tuscolum, Over-the-Rhine, the University/Uptown area and the “Incline District” to the west of downtown in East Price Hill.

Overall, the multifamily market should continue to strengthen as renters return in droves, landlords find pricing power, and investors and developers look for opportunities.

Gladys Risma is a senior associate for Colliers Turley Martin Tucker’s regional office in Cincinnati. She specializes in the investment market for multifamily properties.