Frederick’s robust multifamily development pipeline may saturate the market.
Last month Crystal Park Apartments, a 314 unit community in Frederick, sold for $44.9 million. Federal Capital Partners had purchased the complex for $28 million in 2009; after investing in capital improvements and adjusting rents accordingly, they turned a tidy profit.
Across the country multifamily real estate assets are the lone commercial sector that grew in value during the recession; thanks to the pop of the housing bubble demand for apartments has been climbing and so have rents.
Frederick is no exception: approximately 1 in every 4 Frederick households occupies a rental unit.
Multifamily vacancy rates in Frederick County 4.9% as recently as 2010; today they hover around 2.3%. Since 2010, apartment rental rates in Frederick County have climbed by nearly 6%.
Frederick has seen little development in new apartment buildings since the peak of the real estate market in 2007, but that is about to change. Developers have taken note of low vacancy rates and high demand for apartments locally and a robust multifamily development pipeline has taken shape during the past several years (Figure 1 click to enlarge).
The multifamily pipeline includes rental and condominium apartment projects.
Even Matan Companies, a developer known here in Frederick for building and leasing commercial flex, warehouse and office buildings, has jumped onto the multifamily bandwagon with a new 352-unit apartment project slated to break ground in 2014.
In a study conducted on behalf of the Maryland Department of Housing and Community Development, Real Property Research Group estimates that by 2016 demand will exceed Frederick’s existing supply of 8,000 multifamily rental units by about 2,500 units.
Based on our research, we’ve confirmed that at least 2,000 multifamily units in Frederick’s pipeline are apartments, but we don’t have a complete breakout of apartment versus condominium units in the pipeline at this time.
A 5% vacancy rate is generally required to maintain a stable and elastic multifamily rental market. Frederick’s market is very tight right now with vacancies just over 2% (even less in rural areas of the county) so there is clearly room for new development.
However, if the pipeline gushes too fast, it could put negative pressure on rents and vacancies despite increased demand. But spread out over time the market may very well be able to absorb the 6,000 multifamily units that appear to be in the pipeline over the next 15 to 20 years.
The development timetable for these projects will be market driven, but by extrapolating historical building permit trends (Figure 2 click to enlarge), it’s possible to estimate when the build-out of these units will occur.
Just for the fun of it we took a stab at how the absorption rate may play out for Frederick County up to 2030. This date is a strategic point in the future, as it happens to be the date that the 2010 approved Frederick County Comprehensive Plan responded to a state mandate to map out a plan to add an additional 36,000 housing units by that date.
In a future post we can delve deeper into how that comp plan has taken a roller coaster ride between opposing views of the last two county commissioner administrations and impacted by a very slow economic recovery.
Figure 3 (click to enlarge) makes several assumptions … or maybe better known as SWAG’s:
- The local economy will continue to trend in a positive direction but with a market correction in the early 2020′s.
- The process of gaining federal, state and local government development approvals will continue to slow the overall project start times.
- Multifamily housing runs an average of about 22% of all building permits issued countywide.
- Housing development project financiers will remain cautious in lending practices, and while projects may receive government approvals, land development and housing construction starts will be much less speculative than in the first decade of the 21st century.
The SWAG scenario shown in Figure 3 projects a total of 29,500 new home building permits to be issued between 2011 and 2030, which includes 6,500 multifamily units of rental and condominium apartments.
Overall this misses the 2010 Comprehensive Plan targets by about 18%, but considering the severity of the recession … Hey, we think this a pretty good guess!
What do you think?
The authors: Rocky Mackintosh is President of MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He also writes for TheTentacle.com. Kathy Krach is a commercial sales and leasing agent with MacRo.