2012 Real Estate Report
|Frozen rental rates point to a possible oversupply of apartments.|
In a typical year in the Capital Region, even during the soft years, average apartment rents increase by about 2% to 3%. If nothing else, the uptick helps apartment owners absorb inflation.
Last year was not a typical year. From 2010 to 2011, average rents didn't even budge, according to a survey included in the annual real estate Trends report by the Greater Baton Rouge Association of Realtors Commercial Investment Division.
“In the 20 years that we've been surveying rental rates, this is the first time we've ever seen them remain flat,” says Craig Davenport, a commercial real estate appraiser with Cook, Moore and Associates.
The good news, if you want to call it that, is that at least rents haven't declined, even though most of the people who came to the Baton Rouge area after Hurricane Katrina have left, while all the new rooms built after the storm with help from GO Zone financing remain. The vacancy rate seems to be holding fairly steady at between 6% and 7%, which is pretty close to the pre-Katrina norm.
“A lot of people will tell you that's a perfectly balanced market,” says Wesley Moore, also of Cook, Moore and Associates. “You should have about 7% vacancy in any given market.” Less than that, and rents tend to spike, which is bad for tenants. More than that, and rates deflate, which hurts owners.
Still, the frozen average rental rates lead Moore to suspect there may in fact be an oversupply of apartments in the region. Many of the nearly 2,000 condo units built from 2006 through 2010 have been converted to apartments, adding to the supply. Davenport predicts rents likely will remain stable, or rise slightly, in 2012.
Recent apartment construction in Baton Rouge tends to be either upscale, student-oriented complexes, such as The Cottages of Baton Rouge on Ben Hur Road, or affordable, tax credit–driven projects, such as the Scott School Apartment Homes on North 19th Street.
And the beat goes on: All of the projects listed in the Trends report as “under construction” or “proposed” will either be affordable units or will be geared toward the luxury student market.
“Apparently the student market is hot right now, because that's where all the new construction is going on right now in Baton Rouge,” Davenport says. He adds that he's noticing a trend toward nicer amenities, including larger clubhouses, better business centers and pools, even complexes with their own small movie theaters.
Meanwhile, partly due to the fact that Baton Rouge doesn't have that many prime open sites, development has started to spread out away from the capital city, primarily into Ascension and Livingston parishes and areas where, in years past, only affordable projects were built.
“Typically, smaller towns would only get tax credit developments,” Davenport says. “Now we're starting to see more and more people wanting to go out in the peripheral areas and build nicer apartment complexes.”
|ZIP CODE||COMPLEXES||UNITS||AVERAGE RENT||VACANCY|
BY THE NUMBERS
5,682 Approximate number of apartments built in the Capital Region since Hurricane Katrina
1,954 Approximate number of condominiums built in the Capital Region from 2006 through 2010
840 Apartment units built during 2011
6.84% Approximate marketwide apartment vacancy rate in fall/winter 2011/2012
0% Average increase in rents for a matched sample of
apartment complexes from fall 2010 to fall 2011
2% to 3% Average rent increase in a typical year
$703 Average rent for a one-bedroom apartment
99 cents Average rent per square foot for a one-bedroom apartment
$1,400 Average rent for a four-bedroom apartment
$1.05 Average rent per square foot for a four-bedroom apartment
Housing demand is, of course, driven by population growth. And, setting aside dramatic circumstances like Hurricane Katrina, population growth is driven by job growth. The federal government took over the count from the state in March of last year, so comparing numbers from before and after that point is dicey, and there are concerns about the methodology the federal government uses. The bottom line is that it's hard to analyze and make predictions about the housing market when it's hard to know if the official job numbers are reliable. But if real job growth is in fact occurring, that should help the market for houses and apartments.
The absorption of new apartment units over the past three years appears to have been helped by the tighter availability of mortgage financing. Tenants who couldn't get a home loan couldn't graduate to home ownership, so they either stayed where they were or perhaps relocated to a newer building. The overall economic uncertainty also dissuaded some people from making the leap into home ownership. However, newly built homes in affordable price ranges—that is, price ranges that might be within reach of erstwhile renters—are starting to sell at a faster rate, which could be bad news for apartment complex owners.
According to Brian Andrews of Andrews Commercial Real Estate, the finance world once again is interested in real estate, and apartments are getting the most attention. Life insurance companies and the government-sponsored entities Fannie Mae and Freddy Mac are showing the most interest. That's good news that tempers the gloom of only a couple of years ago, when a looming financing shortage threatened to force even some performing properties in relatively healthy markets, such as Baton Rouge, into foreclosure.
In the wake of Hurricane Katrina, some apartment developers saw the Interstate 12 corridor between Baton Rouge and Slidell as a growth market. Denham Springs nearly doubled its number of apartment units overnight, with projects such as The Parc at Denham, a 224-unit complex completed in 2011. Wesley Moore of appraisers Cook, Moore and Associates says only about 68% of the apartments in the Denham Springs submarket were occupied in 2011, far below the regional rate of about 93%. “There were a lot of units built in a short period of time in a market that didn't have many units to start with,” he says. “The units that have been built are gradually being absorbed.”
Hallmark Campus Communities, of Columbus, Ohio, has plans to build University Edge, an upscale, 158-unit student-oriented complex, in Baton Rouge. No big surprise there; they'll have plenty of company while competing for the luxury student market. What makes this project intriguing is its location at Iowa and West McKinley streets, in a relatively low-income area north of LSU. Moore says Hallmark paid a premium for the land, and says they're confident they will be able to change the character of the neighborhood. Time will tell if they're right.
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