Ohio Multifamily Markets Mostly in Good Shape: Marcus & Millichap

Cleveland--Three recent second-quarter 2010 reports on the three major Ohio multifamily markets--metro Cleveland, Cincinnati and Columbus--by the real estate investment specialist Marcus & Millichap paint a largely optimistic picture for the property type, though not entirely.

Dees Stribling, Contributing Editor

Cleveland–Three recent second-quarter 2010 reports on the three major Ohio multifamily markets—metro Cleveland, Cincinnati and Columbus—by the real estate investment specialist Marcus & Millichap paint a largely optimistic picture for the property type, though not entirely. As usual, even within the same state, various markets are going to be affected by peculiarly local circumstances.

Cleveland, the largest metro area in Ohio, benefited from the acceleration of the U.S. manufacturing sector in the first half of 2010, and thus its apartment market benefited as well, according to Marcus & Millichap’s latest Cleveland Area Report. Employers created about 18,000 jobs in the Cleveland area during the first six months of the year, the largest gain in employment in the area in a comparable period since 1987.

Though this kind of job growth isn’t expected to persist during the second half of 2010, apartment market fundamentals will continue to improve throughout the market, mainly because very little new product is coming on line. The report predicts that this year will end with an average vacancy rate of 6.6 percent, down 20 basis points from a year earlier. Effective rents will rise by 1.2 percent. It might not seem like much, but effective rents were down 3.7 percent in 2009.

The Cincinnati-area apartment market also benefited from blue-collar hiring during 1Q10, noted Marcus & Millichap’s report on that market, with some 5,800 positions created during the first half, compared with a loss of about 2,500 white-collar jobs (information, financial services, and so forth). “While the delayed recovery in office-using sectors held vacancy improvements in top-tier rentals to just 10 basis points year-to-date,” the report noted, “a more rapid recovery in blue-collar employment will enable Class B/C property owners to build on the 50 basis-point decline in vacancy recorded during the first half.”

Owners of Class A properties in Cincinnati will have to deal with this situation as best they can. With little new demand forming for those kinds of apartment units, landlords will probably keep a lid on rents and continue to offer incentives.

In Columbus, a market long sustained by state government and the massive Ohio State University, nevertheless has a “choppy” second half of 2010 to look forward, according to the company’s Columbus Metro Area report. “The first half of 2010 marked the first consecutive quarterly job gains since mid-2007 [for the market], but sustained hiring continues to elude a number of sectors,” it notes.

By the end of this year, the metro Columbus market will have experienced a 70 basis point increase in vacancies, to 9.9 percent, though top-tier properties will do better in that regard (vacancies down 10 basis points) than Class B and C properties.

The three Ohio markets all have interesting properties to offer to investors with the wherewithal to do deals during the last half of 2010, Marcus & Millichap says, but in terms of strengths and weaknesses, each market is a mixed bag. In Cleveland, for instance, investment “velocity will likely tick higher in the top tier as cap rates in the segment fail to ascend to levels owners once anticipated.”

In Cincinnati, investors are still interested in Class A and high-quality Class B properties, but owners aren’t all together interested in selling, so sales of distressed and lower-tier properties will probably characterize the investment market in the next six months. Likewise in Columbus, according to that market report: “Deals involving financial distressed and operationally challenged properties will continue to dominate the Columbus investment market,” it says. “As a result, sales prices will remain depressed this year.”

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