Multifamily i Ohio

Lack of inventory only thing slowing Cincinnati apartment market

Lack of inventory only thing holding back Cincinnati apartment market,ph01
Milhaus is developing the seven-story Artistry apartment project in downtown Cincinnati.

The Cincinnati Apartment rental market continues to be robust with a strong appetite for units in the urban core and particularly in Cincinnati’s CBD. This trend has been ongoing for several years with conversions and new units coming online in the Over the Rhine neighborhood as well as the development at The Banks.

The arts and other nearby entertainment amenities such as the Great American Ballpark, Paul Brown Stadium, The Aronoff Center for the Arts, the JACK Cincinnati Casino, the revitalized Music Hall and Washington Park are a strong draw to the live-and-work environment in downtown Cincinnati, with buildings having been rehabbed and repurposed into upscale modern living spaces.

Kroger invested into the downtown market last year by opening a grocery in the CBD in the third quarter of 2019. Currently the west end of downtown is going through a revitalization with the building of the new soccer stadium. Apartment properties there are a strong draw for investment capital from out-of-town investors at a price as low as $30,000 per door versus the current average price for class-C units now at $54,000 per door.

Rent growth and yields are above the national average with rent hikes averaging 5.3 percent in 2019 and expected to rise 5.1 percent by the end of 2020, making the average effective rent $1,030 a month. Last year 800 new units were delivered in 2019 and this year 1,700 new units will come online with development concentrated in central Cincinnati. The absorption of these units will increase market vacancy to 3.5 percent.

The amenities that draw tenants to a particular area downtown are its location; closeness to work; the area’s bars, restaurants and cyber cafes; and outside living spaces such as parks, bike paths and walking paths.

The amenities that draw people to a particular property are onsite fitness centers, heated rooftop pools and rooftops with gardens that barbecue grills and community clubhouses. Views are also a major draw. Developers have been attracting tenants in the area with units that have open floor plans, built-in microwaves and bar-style granite countertops. Loft units in the older properties are also popular. The Cincinnati streetcar public transit has also helped with this migration, making public transportation in the downtown area convenient.

Cincinnati is growing. It is home to nine Fortune 500 companies, with 10,000 new jobs expected to be created this year.

Currently there are no Class-A properties on the market in the metro or suburban areas. The tremendous influx of capital acquiring value-add class-C units has greatly diminished because of inventory shortages. The current inventory of Class-C and -C+ properties for sale is minimal and quite competitive with CAP rates or yields that just two years ago were at 8.5 percent to 9.5 percent and are now at 6.75 percent to 7.5 percent in desirable areas. This has driven acquisition demand in the city to neighborhoods such as Northside and the east side areas of Walnut Hills, Mount Lookout, Oakley and Hyde Park, which produce yields at or near 7 percent.

As a multifamily broker, I have many buyers, some needing to do a 1031 Exchange, but little inventory The properties that pencil out as a viable investment sell quickly at elevated prices to clients connected to that broker. These properties are garden-style units with little to no amenities located in suburban locations. The current market has few properties for sale in these less-desirable areas with garden-style units priced at an average of $40,658 per door.

Northern Kentucky is a sought-after market with few properties coming to market or changing hands in the past two years. The areas along the riverfront and on the hills facing the Ohio River has seen development in past years thanks in part to the specular views of downtown Cincinnati.

There are several high-dollar developments in the making or currently under construction in the city’s urban and uptown neighborhoods. In the highly sought-after neighborhood of Oakley, a new development with bring 372 Market Rate units in addition to assisted-living units. In Walnut Hills, a $29 million project with 176 workforce units will be built. The city approved a 15-year community reinvestment area tax exemption agreement for 100 percent of the value of the improvements.

The new Artistry development will be built on the riverfront at a cost of $77 million. It will have 344 units and a parking garage with 390 spaces. The property will also have 8,000 square feet of commercial space. The amenities will include a rooftop pool and aqua lounge, two-story fitness center, yoga studio, pet spa, community garden, secure bike storage and co-working spaces both indoor and outdoor.

In the suburban neighborhood of Blue Ash, a major white-collar employment area, the redevelopment of the former Blue Ash Airport has 290 units currently under construction with monthly asking rents of $1,941. The average unit size is 1,089 square feet. Units will begin to lease in March of 2020. Expected rental rates will average $1.78 per-square-foot.

The remainder of 2020 will continue to provide opportunities for informed investors watching the market and seizing opportunities that surface. Value-add opportunities will present themselves, but in lower-income neighborhoods, making the investment a leap of faith. Class-C units will hold their current values but rental increases will be modest as vacancy should begin to return to 5 percent to 6 percent.

Suburban properties will be highly sought to avoid the “Cincinnati Metropolitan Water & Sewer District’s” expensive water and sewer service. Across the metro area last year, rent increases were beginning to bump up against single-family housing affordability. But this year, single-family housing inventory has greatly diminished, which has increased prices. That has resulted in renters staying in place and owners being reluctant to sell.

Robert Merkt is a vice president in the Cincinnati office of Lee & Associates.