Market Spotlight: Cincinnati is Booming as Economic Expansion Continues
As the tail of this economic expansion extends further, real estate investors continue to search for yield by investing outside of primary markets. Cincinnati has been a beneficiary of that trend, and the market is booming.
The metro’s multifamily market is experiencing record investment activity and rent growth. This is coupled with low vacancy and high apartment demand. Employment levels are at all-time highs and unemployment is at historical lows. Going forward, Cincinnati’s highly educated and skilled workforce will assure it is well positioned as the economic expansion continues.
Cincinnati Investment Sales Market
Multifamily investment activity in Cincinnati has reached a torrid pace. Sales volume hit a record $609.2 million during 2018, according to Real Capital Analytics (RCA). This volume level eclipsed the 2017 total of $316.7 million, and the previous record-high of $447.3 million in 2016.
The average sale price in 2018 was $75,360/unit, up more than 20% as compared with $62,754/unit in 2017. Additionally, the market started off 2019 on a high note. The first three months of the year recorded a whopping $260.8 million in volume. This was significantly higher than the five-year quarterly average of $96.8 million.
Institutional investors have also increased their interest in the market, making up 13.7% of apartment volume in 2018 (private investors made up 67.1% and cross-border was 19.2%), compared with no activity in 2017 (when the volume was 100% private).
As expected with the property price increases, yields have steadily declined. Cap rates for Cincinnati apartment transactions averaged 6.7% for 2018, the lowest level on record for the market. They were also down from 7.1% in 2017. RCA records show the most recent high was in 2002, when cap rates averaged 9.0%.
On the back of solid investment activity, apartment rent growth in the Cincinnati market continues to accelerate. According to Reis, the average asking rent finished the first quarter of 2019 at $920/unit, up 3.8% from $886/unit one year ago. Rent growth for 2018 was 4.1%, matching 2016 for the market’s highest annual growth rate on record. Class A rent growth was 4.2% and Class B/C was 3.3%. Reis forecasts asking rents overall to increase by 3.8% during 2019.
The market’s vacancy rate improved to 4.1% during the first quarter, down from 4.4% one year ago. This is well below the most recent high of 9.3% during 2003 and 2004. The vacancy rate for Class A apartments was 5.7% at the end of the year and 3.5% for Class B/C assets. Reis reported that strong demand, the market’s small size and limited supply are driving low vacancy conditions. Reis forecasts the overall vacancy rate to climb only slightly in 2019, finishing at 4.6%.
Cincinnati’s development pipeline remains active, with more than 5,300 new apartment units delivered over the last three years. During that time, absorption has totaled 4,300 units. While new supply is currently outpacing demand, the market is making up for a lack of development during the downturn. From 2010 through 2015, only 3,600 units were completed, while 8,100 units were absorbed. Reis forecasts that nearly 1,100 new units are expected to be delivered during 2019, with net absorption expected to approach 800 units.
Employment levels in Cincinnati have reached historic highs, supported by a strong business services sector, a hot housing market, and a growing commercial aviation cluster. Long-term growth will be solidified by a highly educated and skilled workforce. However, uncertainties around trade policy present risks, given the area’s exposure to tariffs.
According to the U.S. Bureau of Labor Statistics, total nonfarm employment in the Cincinnati, OH-KY-IN metro area increased 1.8% during the 12-months ending in March 2019. This was up from 1.1% in 2018, and higher than the U.S. overall rate of 1.7%. Additionally, the unemployment rate improved to 3.6% at the end of March, matching the lowest level seen since 2001.
The metro’s housing market has outperformed the national rate, driven by limited supply and accelerated demand. Home prices in Cincinnati increased 6.8% during 2018, significantly higher than the U.S. overall growth rate of 6.0%, according to the U.S. Federal Housing Finance Agency House Price Index.
Interested in multifamily investment in the Cincinnati market? Contact Arbor today to learn about our array of multifamily financing options.