A growing local economy and increased enrollment at the University of Arkansas kept multifamily occupancy levels stable at 96.5% last year, despite the opening of 823 new student housing units since the fall of 2012.
A recent report by CBRE-Northwest found that occupancy rates were strong enough to prompt a 3.3% overall hike in rental rates last year, led by a 5.3% rate increase in Fayetteville.
Brian Donahue, senior associate and author of the CBRE report, said private multifamily investment has been stagnant since 2012 as the University of Arkansas student housing growth has escalated. Looking ahead, he said the university will add another 250 units this year and 500 more next year, which is likely to keep private investment at bay.
In 2013, there were just 96 new units completed outside of UA student housing —the Copperstone Phase II project in Bentonville. Donahue said Lindsey Management still has plans to build the Trails at Rainbow Curve, which is 487 additional units planned for Bentonville. ERC recently announced a 62 unit multifamily, mixed-use project – the “Thrive” – in Bentonville’s new Art District.
These private projects are expected to temper occupancy rates in Bentonville, which were 93.5% at the end of 2013, according the CBRE report. Donahue said Bentonville’s occupancy rate decreased from 98% midyear 2013 to 93.5% at year-end because of the recent opening of Cornerstone Phase II.
ERC is slated to break ground in the next 45 days on the “Thrive” project. Kyle Cook with Lindsey Management said dirt work has begun on the Trails at Rainbow Curve project. He expects some of the units will be available to lease by the end of the year, with the entire project coming online in the first quarter of 2015.
Donahue expects the low vacancy rate in other submarkets to spur more private investment over the next 12 to 18 months. Rogers reports the lowest vacancy rates at 1.5% year-end, followed by Fayetteville at 2.5%. Springdale showed 5% vacancy rates at the end of 2013, according to the report.
In the most recent Skyline Report for the multifamily sector, Kathy Deck, director of the Center for Business and Economic Research at the University of Arkansas, credited low vacancy rates to an improved employment metric across the region.
“Northwest Arkansas is benefiting from positive growth in our job production,” Deck said in the September 2013 report. “The area gained 9,000 new jobs last year on top of the 9,000 created in 2011. That kind of growth puts some positive stress on our capacity to house these new workers.”
Strong demand for units has allowed property managers to raise rates in one and two-bedroom apartments last year, according to the CBRE report.
The average rental rate across the region was $591, a $19 per month increase from the prior year. One bedroom units rose the most averaging $502 in monthly rent. The rent rose $31 per month over the past year. Two bedroom, two bath units rose $15 per month to $699. Three bedroom units stayed steady at $855 per months, with four bedroom units rents declined $83 per month to $1,033.
Donahue reports rent specials and concessions were up slightly last year, but given the demand for units, deals are not that common in the Northwest Arkansas market.
New household formation is key for the multifamily sector and this is one metric that is running behind schedule. Roughly 1.5 million new households are typically formed each year, but since the recession of 2008, this activity has slowed.
The National Association of Realty estimates household formation fell by 3.5 million over the past five years. At the same time population has grown. Experts believe as the economy improves and the employment picture improves, more people will move out on their own. Real estate experts believe this pent-up demand will be a source of strength in single family home sales for the next 18 to 24 months.
CBRE warns that in Northwest Arkansas there could be softening in the occupancy levels once the 750 new student housing projects come online late this year and next. However, the market has been able to absorb the 823 new units opening since the fall of 2012, given the UA’s enrollment increase.
As the market fundamentals remain strong, Donahue expects all classes of multifamily to fare well. He said the market is also ripe for selling these properties as investor demand is growing.
He said with single family residential now in full recovery, a potential bump in tourism with Crystal Bridges Museum and steady job growth, Northwest Arkansas’ apartment market will maintain its upward momentum in the near term.