Indianapolis, Indiana

Transcription

RED CAPITAL GROUP® | MARKET OVERVIEW
Multifamily Housing Update 2Q13 September 2013
Payroll Job Summary
Total Payrolls
935.3m
Annual Change
21.3m(2.3%)
2013 Forecast
16.1m
2014 Forecast
17.5m
2015 Forecast
21.4m
2016 Forecast
19.5m
Unemployment
7.5% (July)
2Q13 Payroll Trends and Forecast
The Indianapolis labor market found another gear
during the second quarter, accelerating from
1Q13’s two-year slowest 15,900-job, 1.8% yearon-year rate of growth to a 21,300-job, 2.3% pace.
The pass was made in spite of sluggish conditions
in the goods producing industries, largely due to
faster expansion in the retail trade and business,
education, health care and leisure services sectors, which hired workers at a combined 19,800job, 4.3% rate, up from 1Q’s 13,100-job gain.
Seasonally-adjusted data told much the same
story. This series suggests that real headcounts
Occupancy Rate Summary
2Q13 Absorption and Occupancy Rate Trends
Occupancy Rate (Reis)
Leasing activity was moderately slower during the
second quarter. Tenants occupied a net of 117
units, according to Reis, down from 208 in the
prior quarter and 311 in the year-earlier period.
Indeed, this was the smallest absorption total
recorded since late 2009. But supply pressures
were non-existent, allowing occupancy to rise 10
basis points sequentially to 94.0% nonetheless.
Axiometrics surveys of larger properties recorded
a 92.3% average stabilized property occupancy
rate, up 50 bps sequentially.
RED 50 Rank
94.0%
47th
Annual Chg. (Reis)
-0.3%
RCR YE13 Forecast
93.5%
RCR YE14 Forecast
92.9%
RCR YE15 Forecast
93.3%
RCR YE16 Forecast
93.3%
Effective Rent Summary
Mean Rent (Reis)
$693
Annual Change
2.4%
RED 50 Rank
38th
RCR YE13 Forecast
2.1%
RCR YE14 Forecast
2.5%
RCR YE15 Forecast
2.7%
RCR YE16 Forecast
2.5%
Trade & Return Summary
$3mm+ Sales
Approx. Proceeds
Avg. Cap Rate (FNM)
Avg. Price/Unit
9
$110mm
5.9%
$45,484
Expected Total Return
7.3%
RED 46 ETR Rank
11th
Risk-adjusted Index
4.49
RED RAI Rank
12th
grew by 7,300 between April and June, the best
spring quarter in more than a decade. And, the
third quarter got off to a flying start as a net of
2,600 workers were added to payrolls in July.
Variables in the 93.8% adj-R2 Indy payroll model
include national employment and output growth,
local income growth and the 10-year UST yield.
The model foresees a slowdown in 3Q to the 1.4%
level, which is validated by preliminary July (2.0%)
and August (1.3%) results. We expect a reacceleration to the low– to mid-2% area by 2H14, with
steady 1.8% to 2.3% gains in 2015 and 2016.
Submarket performance was mixed. Six submarkets notched occupancy gains, led by Central
(1.7%) and Southeast (0.9%), while seven suffered
setbacks, most notably Far Northeast (-1.7%).
Variables in our absorption model include home
prices, payroll growth, supply, rent and metro personal income. Model output suggests that tenant
demand is unlikely to keep pace with supply of
over 2,500 units in the pipeline over the next six
quarters. Consequently, a 100 bps occupancy rate
decrease is the most probable outcome by YE14.
2Q13 Effective Rent Trends
Rents powered forward with some degree of vigor
in spite of moderate tenant demand, rising $5
(0.7%) for the second consecutive quarter. Expressed on a year-over-year basis, rent growth
proceeded at a 2.4% rate, down from 3.0% and
3.5% paces during 1Q13 and 4Q12, respectively.
Among properties surveyed for at least four years,
Axiometrics report a weighted average $699 rent,
up 1.8% sequentially and 1.8% year-over-year.
Six properties delivered in 2012 and 2013 reported average effective rent of $1,362 or $1.26/sf.
None reported net concessions costs. But rent
trends among the group were soft, with the average rent declining over -5% during lease-up.
The RCR rent model is largely driven by lags of the
dependent variable as well as income, payroll and
lagged vacancy variables. The 91.6% adj-R2 equation foresees rents continuing to coast below the
2.5% mark through late 2014 before regaining
speed in 2015 to the high-2% to low-3% area.
Rents are expected to grow at a compound annual
rate of 2.5% 2012-17, up from 1.7% 2002-2012.
2Q13 Property Markets and Total Returns
Following a quiet first quarter sales momentum
improved during the spring. Investors closed on a
total of nine properties valued at $3 million or
more for total proceeds of about $110mm, more
than four times the first quarter aggregate.
Among the five trades for which pricing data were
available, the average price of each unit sold was
$45,484, up from $18,193 in the previous quarter. Cap rates were mostly in the 6.5% to 8.5%
range, with investment quality class-B assets settling in a mid– to high-6% range.
The bellwether transaction involved a 19-year old
class-B garden property located in Carmel. The
asset attracted interest at a price equating to
$81,760 per unit and an estimated 6.7% yield.
Employing a 6.7% generic going-in cap rate and
model derived rent, occupancy and exit cap rate
(7.9%) forecasts, we estimate that a typical Indianapolis investor would expect to generate a 7.3% 5year, unlevered total return, ranking 11th among
the RED 46. An RAI of 4.49 qualifies for 12th
place in respect to risk-adjusted returns..
MARKET OVERVIEW 2Q13 | INDIANAPOLIS, INDIANA
Metro Occupancy Rate Trends
Source: Reis History, RCR Forecasts
Average Occupancy Rate
98%
RED 46 AVERAGE
96%
INDIANAPOLIS
94%
94.0%
92%
92.8%
93.4%
93.1%
93.1%
90%
88%
2Q 07
2Q 08
2Q 09
2Q 10
2Q 11
2Q 12
2Q 13
2Q 14
2Q 15
2Q 16
2Q 17
Metro Cap Rate Trends
Average Cap Rate
Source: eFannie.com, RCR Calculations
8.5%
8.0%
7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%
I NDI ANA POLI S
EA ST NO CENT R EGI ON
6. 9%
1Q11
8. 2%
7. 7%
5. 9%
6. 6%
6. 5%
2Q11
3Q11
4Q11
1Q12
2Q12
5. 9%
6. 9%
2Q13
3Q13
5. 4%
3Q12
4Q12
1Q13
Metro Payroll History and Forecast
Annual Chg (000)
Source: BLS History, RCR Forecasts
30
20
10
0
-10
-20
-30
-40
-50
I ND Y
2008
2009
2010
2011
2012
2013f
2014f
2015f
2016f
2017f
(1. 9)
(41. 5)
(1. 8)
17. 5
25. 3
16. 1
17. 5
21. 4
19. 5
18. 0
NOTABLE TRANSACTIONS
Property Class/
Type (Constr.)
Date of
Transaction
Total Price /
<Appr Val>
(in millions)
Price /
<Appr Val>
per unit
Estimated
Cap Rate
Cottages of Fall Creek (Northeast)
Carmel Landing (Hamilton County)
Lodge at Trail’s Edge (North Marion Co.)
B-/GLR (1969)
B+/GLR (1994)
B / GLR (1981)
7-May-2013
7-Jun-2013
17-Jun-2013
$28.0
$24.2
$18.4
$37,185
$81,757
$68,657
7.1%
6.7%
6.6%
Ashford at Keystone (Northeast)
Autumn Breeze Apartments
REO C / (1967)
A / GLR (2009)
17-Jul-2013
May-2013
$16.5
<$31.7>
$36,344
<$113,321>
8.5% p.f.
7.1% FNM Refi
Property Name (Submarket)
RED CAPITAL Research | September 2013
Metro Effective Rent Trends
Sources: Reis, Inc., Axiometrics, RCR Forecast
6%
YoY Rent Trend
4%
2. 2%
2%
2. 6%
2. 6%
3. 1%
0%
-2%
RED 46 AVERAGE
INDIANAPOLIS (AXIOMETRICS)
INDIANAPOLIS (Reis, RCR)
-4%
-6%
2Q 07
2Q 08
2Q 09
2Q 10
2Q 11
2Q 12
2Q 13
2Q 14
2Q 15
2Q 16
2Q 17
Metro Home Price Trends
Source: FHFA Home Price Indices and RCR Forecasts
6%
Y-o-Y % Change
4%
2%
0%
-2%
-4%
USA
-6%
EA ST NO C ENTRA L REGION
INDIANAPOLIS
-8%
2010
2011
2012
2013f
2014f
2015f
2016f
2017f
Metro Payroll Employment Trends
Source: BLS, Institute for Economic Competitiveness at UCF & RCR
4.0%
Y-o-Y % Change
3.0%
1.6%
2.3%
2.0%
2.3%
2.1%
1.8%
1.0%
0.0%
-1.0%
U.S.A.
INDIANAPOLIS
-2.0%
2010
2011
2012
2013f
2014f
2015f
2016f
2017f
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or
financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been
gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report.
RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party
sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to
participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.
SUBMARKET TRENDS
Effective Rent
Submarket
2Q12
Physical Vacancy
2Q13
Change
2Q12
2Q13
Change
Boone / Hendricks Counties
$814
$833
2.4%
6.4%
6.0%
-40 bps
Castleton
$753
$768
1.9%
4.1%
3.5%
-60 bps
Central
$862
$858
-0.4%
4.3%
2.4%
-190 bps
East
$562
$566
0.6%
9.1%
12.7%
360 bps
Far Northeast
$592
$604
2.0%
7.9%
10.8%
290 bps
Far Northwest
$675
$680
0.8%
4.5%
4.4%
-10 bps
Hamilton County
$839
$869
3.5%
5.5%
5.2%
-30 bps
Hancock / Shelby Counties
$629
$627
-0.3%
3.4%
2.1%
-130 bps
Johnson County
$647
$658
1.7%
4.4%
4.4%
Unchd
Near Northwest
$604
$630
4.3%
5.6%
5.6%
Unchd
Southeast
$642
$661
3.1%
6.7%
5.5%
-120 bps
Southwest
$640
$662
3.4%
4.3%
5.3%
100 bps
$584
$600
2.8%
6.8%
7.5%
70 bps
$677
$693
2.4%
5.7%
6.0%
30 bps
West
Metro
Total Return
12%
I NDY (R A I =2. 07)
R ED 46 A VG. (R AI =3. 54)
10%
8%
Total Return Distributions
Source: RED CAPITAL Research
8.1%
7.3%
5.2%
6.5%
9.1%
8.5%
7.1%
6.0%
4.9%
6%
3.1%
4%
2%
0%
90%
70%
50%
30%
P roba bility of Ac hie ving S ta te d Re turn or G re a te r
10%
RED CAPITAL GROUP
For more information about RED’s research capabilities contact:
Daniel J. Hogan, Director of Research
[email protected]
614-857-1416
James P. Hensley, Senior Managing Director
Head of Mortgage Originations
[email protected]
800-837-5100
Multifamily Housing Update 1Q13 June 2013
Payroll Job Summary
Total Payrolls
911.1m
Annual Change
15.9m(1.8%)
2013 Forecast
15.2m
2014 Forecast
22.0m
2015 Forecast
24.5m
2016 Forecast
18.0m
Unemployment
7.1% (Apr)
Indianapolis received a shot in the arm from the
BLS in March when the agency released its annual
payroll series revisions. The re-benchmarking
exercise uncovered 20,800 previously uncounted
2012 jobs, boosting FY12 net job creation from
the originally reported 11,900 level to a robust
25,300 (2.8%), representing the fastest growth
rate among the 11 Midwest markets we cover.
Job creation was considerably slower during
1Q13, however, largely due to weaker conditions
in the skilled service and government sectors.
Payrolls increased at a 15,900-job, 1.8% rate in
1Q13 Absorption and Occupancy Rate Trends
Apartment demand moderated to some degree
over the winter as renters occupied a net of 258
vacant units during the first quarter, down from
432 in 4Q12 and 437 in the year earlier period.
Accounting for 97 units added to inventory, occupancy increased 20 basis points sequentially to
94.2%. Occupancy dropped 10 bps year-over-year.
RED 50 Rank
94.2%
46th
Annual Chg. (Reis)
-0.1%
RCR YE13 Forecast
93.5%
RCR YE14 Forecast
92.7%
RCR YE15 Forecast
92.3%
RCR YE16 Forecast
92.6%
Mean Rent (Reis)
$688
Annual Change
3.0%
RED 50 Rank
35th
RCR YE13 Forecast
2.7%
RCR YE14 Forecast
2.8%
RCR YE15 Forecast
3.3%
RCR YE16 Forecast
3.1%
$3mm+ Sales
Approx. Proceeds
Median Cap Rate (FNM)
Avg. Price/Unit
RED 46 ETR Rank
4
$14.3mm
5.9%
$18,147
8.9%
8Th
Risk-adjusted Index
5.60
RED RAI Rank
10th
Submarket performance was mixed as occupancy
increased sequentially in six and fell in eight. Hancock and Shelby counties posted the largest gains,
the period, ranking third in the region behind Minneapolis and Louisville.
The RCR Indy payroll model produces an optimistic employment outlook. The 2013 spring and
summer quarters are likely to yield further moderate growth, but faster job creation is in the offing
for the fall. The most probably outcome is for a
15,200-job net gain this year, followed by a return
to 2.0% to 2.5% growth rates in 2014 and 2015.
Average growth from 2013 to 2015 is projected to
be 2.2%, again the fastest in the region, topping
#2 Minneapolis (2.0%) and #3 Columbus (1.9%).
rising 60 bps to 97.3%, while the Boone/
Hendricks (-150 bps) and East (-190 bps) submarkets suffered the largest setbacks.
Supply promises to be Indianapolis’s greatest
occupancy challenge. Our model projects that
7,566 new units will be delivered during the 5-year
forecast period, about 1,500 more than we expect
to be absorbed. As a result, the occupancy trend
will be biased downward, falling about 190 bps by
YE15, before recovering to 93% by 2017.
1Q13 Effective Rent Trends
Average effective rents increased $5 (0.9%) sequentially to $688, representing the largest sequential quarter gain since spring 2012. Expressed on a year-on-year basis, rents increased
3% or more for the fourth consecutive quarter — in
this case 3.0% — a feat accomplished only twice
previously during the past 15 years, the last instance observed in 2008.
Five submarkets posted sequential quarter gains
of 1.2% or higher led by Boone and Hendricks
counties, which chalked down a $23 (2.9%) surge.
Both the Near Northwest and Southeast markets
reported 1.9% sequential quarter gains.
The RCR Indy rent model indicates that personal
income and inflation are the principal endogenous
factors driving metro rent growth. Both factors are
likely to make positive contributions to rent trends
as metro employment booms and the national
economic engine runs hotter. As a result, the
model forecasts strong rent growth by regional
standards averaging 3.1% annually through 2017,
trailing only Chicago (3.2%) among Midwest peers.
Investors were relatively active near year-end as
ten properties of 80 units or more exchanged
hands during 4Q12. Proceeds of trades for which
price information was available totaled $69.1mm
and the average price of units sold was $38,784.
Market participants hibernated during the winter
months, however, as 1Q13 saw just four transactions involving 1,284 units. Pricing data were
available for two trades: a distressed Lawrence
district property valued at $8,564 per unit and a
40-year old garden project near the Speedway
that changed ownership for a $26,290/unit price.
While data are thin we continue to believe that
institutional quality Indianapolis assets trade at a
premium to properties in Ohio and Michigan metro
areas. Accordingly, we employ a 6.5% generic cap
rate to estimate expected total return, 50 to 75
bps lower than regional peers. This initial yield and
our metro occupancy and rent forecasts produce a
8.9% expected 5-year annual total return, ranking
RED 46 #8. The risk-adjusted index also is above
average at 5.60, ranking 10th among the national
peer group and highest in the Mid-East and Midwest regions.
Metro Occupancy Rate
96%
RED 46 AVERAGE
95%
INDIANAPOLIS
94%
93%
92%
91%
90%
89%
88%
1Q 07
1Q 08
1Q 09
1Q 10
1Q 11
1Q 12
1Q 13
1Q 14
1Q 15
1Q 16
1Q 17
I NDI ANA POLI S
Average Cap Rate
8.5%
EAST NO CENTRAL REG
7.5%
6.5%
5.5%
6. 9%
8. 2%
7. 7%
5. 9%
6. 6%
6.5%
2Q11
3Q11
4Q11
1Q12
2Q12
5. 9%
5. 4%
4.5%
4Q10
1Q11
3Q12
4Q12
1Q13
2Q13
Annual Chg (000)
30
20
10
0
-10
-20
-30
-40
-50
I NDY
2008
2009
2010
2011
2012
2013f
2014f
2015f
2016f
2017f
(1. 9)
(41. 5)
(1. 8)
17. 5
25. 3
15. 2
22. 0
24. 5
18. 0
25. 6
The Bristol Apartments (Southwest)
Lexington Park (East Marion County)
International Village (West Marion Co.)
Postbrook East (East Marion County)
Horizons Apartments (Southwest)
Property Class/
Type (Constr.)
Date of
Transaction
Total Price
(in millions)
Value or Price per
Unit
Estimated
Cap Rate
B+/GLR (2005)
Dist/GLR(1970)
B-/GLR (1969)
Dist/GLR(1971)
B-/GLR (1978)
28-Nov-2012
7-Jan-2013
15-Jan-2013
2-Apr-2013
Mar-2013
$17.1
$3.1
$11.2
$3.3
$11.6
$81,043
$8,564
$26,291
$10,997
$42,153
6.2%
NA
9.0%
8.5%
5.9% (FN Refi)
RED CAPITAL Research | June 2013
6%
YoY Rent Trend
4%
2%
0%
-2%
RED 46 AVERAGE
-4%
1Q 07
INDIANAPOLIS (REIS/RCR)
INDIANAPOLIS AXIOM
1Q 08
1Q 09
1Q 10
1Q 11
1Q 12
1Q 13
1Q 14
1Q 15
1Q 16
1Q 17
Y-o-Y % Change
Source: FHFA Home Price Indices
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
U. S. A .
2006
2007
2008
2009
2010
2011
INDIANAPOLIS
2012
2013
Y-o-Y % Change
Source: BLS , INSITUTE FOR ECONOMIC COMPETITIVENESS & RCR
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
-6%
U.S.A.
2008
2009
2010
2011
2012
2013f
2014f
INDIANAPOLIS
2015f
2016f
gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations
or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot
be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under
no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any
particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel,
accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market
conditions and other factors.
RED CAPITAL Research | June 2013
SUBMARKET TRENDS
Effective Rent
Submarket
1Q12
Physical Vacancy
1Q13
Change
1Q12
1Q13
Change
$803
$829
3.3%
7.2%
6.4%
-80 bps
Castleton
$741
$759
2.4%
4.1%
4.0%
-10 bps
Central
$855
$862
0.8%
3.4%
4.1%
70 bps
East
$555
$559
0.7%
9.1%
12.3%
320 bps
Far Northeast
$582
$597
2.5%
7.5%
9.1%
160 bps
Far Northwest
$666
$679
2.1%
4.0%
4.0%
Unchd
Hamilton County
$828
$861
4.0%
6.2%
5.5%
-70 bps
$620
$625
0.8%
4.3%
2.7%
-160 bps
Johnson County
$639
$652
2.1%
4.9%
4.0%
-90 bps
Near Northwest
$599
$626
4.6%
5.0%
5.2%
20 bps
Southeast
$633
$660
4.2%
6.5%
6.4%
-10 bps
Southwest
$633
$657
3.8%
4.3%
4.8%
50 bps
West
$578
$596
3.1%
6.6%
6.6%
Unchd
$668
$688
3.0%
5.7%
5.8%
10 bps
Metro
Total Return
12%
I NDY (R A I =5. 60)
R ED 46 A V G. (R A I =3. 40)
9.4%
8.6%
10%
8%
7.7%
6.4%
10.6%
10.1%
8.4%
7.2%
5.9%
6%
3.9%
4%
2%
0%
90%
70%
50%
30%
10%
RED CAPITAL GROUP
[email protected]
614-857-1416
Kenneth H. Bowen, President, Red Mortgage Capital, LLC
[email protected]
800-837-5100
Multifamily Housing Update 4Q12 April 2013
Payroll Job Summary
Total Payrolls
925.4m
Annual Change
18.4m(2.0%)
2013 Forecast
16.3.m
2014 Forecast
17.3m
2015 Forecast
17.8m
2016 Forecast
15.8m
Unemployment
8.7% (Jan)
Indianapolis was among the biggest beneficiaries
of the BLS’s payroll series re-benchmarking exercise this year as revised employment figures added 7,400 and 20,800 jobs respectively to previous estimates of 2011 and 2012 average monthly headcounts. Job growth for 2012 was upwardly
revised from the initial 11,900-job, 1.3% estimate
to an impressive 25,300-job, 2.8% surge.
Moreover, the data show that the Capital City job
market ended 2012 with a much stronger head of
steam than previously understood. Rather than
limping to the checkered flag with a tepid 9,700-
4Q12 Absorption and Vacancy Rate Trends
Following a three-year low net absorption performance in 3Q12 (184 units) tenant demand rebounded in the fall quarter as a net of 529 previously vacant units were occupied. Although down
from 4Q11’s robust 1,043-unit performance, absorption in the latest quarter easily surpassed the
213-unit 13-year fourth quarter average.
RED 50 Rank
94.4%
44th
Annual Chg. (Reis)
+0.4%
RCR YE13 Forecast
93.8%
RCR YE14 Forecast
93.7%
RCR YE15 Forecast
93.7%
RCR YE16 Forecast
93.4%
Mean Rent (Reis)
$682
Annual Change
3.3%
RED 50 Rank
37th
RCR YE13 Forecast
2.5%
RCR YE14 Forecast
2.7%
RCR YE15 Forecast
2.9%
RCR YE16 Forecast
2.8%
$2mm+ Sales
Approx. Proceeds
Avg. Cap Rate (FNM)
Avg. Price/Unit
7
$77.8mm
5.82%
$38,784
7.8%
RED 46 ETR Rank
23rd
Risk-adjusted Index
3.89
RED RAI Rank
18th
Occupancy increased only 10 basis points sequentially, as developers completed a total of 455
units during the fourth quarter. Consequently,
metro average occupancy (94.4%) remained in the
job y-o-y 4Q12 advance, Indianapolis exited last
year’s final turn at an 18,400-job, 2.0% year-onyear pace, fueled by rapid hiring by retailers, manufacturers and food service establishments. Explosive growth in the business service sector
cooled, however, in spite of an excellent 3,000-job
advance in the professional service component.
The March revisions make a meaningful impact
on our econometric forecast. Our model now forecasts creation of 16,300, 17,300 and 17,800
jobs respectively in 2013, 2014 and 2015, from
earlier 13,100, 14,700 and 16,400 projections.
lower RED 50 quintile on 44th position overall.
Occupancy increased in three submarkets: Far
Northwest, West and Johnson Co. Demand was
weaker in Castleton and East submarkets where
occupancy declined 50 and 150 bps, respectively.
The RCR absorption model projects robust absorption activity in 2013 and 2014, netting 1,759 and
1,936 units, respectively, up from 1,450 last year.
But supply is expected to be stronger still, putting
moderate downward pressure on occupancy.
4Q12 Rent Trends
Effective rents increased just $2 (0.3%) sequentially for the second consecutive quarter to a $682
average. The quarter-to-quarter advance was the
42nd fastest among the RED 50. Measured on a
year-over-year basis rents were up 3.3%, moderately slower than 3Q12’s 3.5% metric, ranking
37th among the large metro peer group.
Five of Indianapolis’s 13 submarkets posted sequential quarter effective rent declines, with peripheral counties (Boone/Hendricks and Hancock/
Shelby) recording the largest (0.5%-0.6%) set-
backs. By contrast, South Side Indianapolis submarkets notched solid gains. Southeast and
Southwest led the charge with $5 (0.7%) and $10
(1.6%) advances, respectively.
The RCR rent model anticipates that year-overyear rent trends will decelerate in 2013, slowing to
about 2.5%. But faster payroll and income growth
will return rent trends above 3% in early 2015 and
maintain it in the high 2% area through 2017.
Rents are expected to advance at a 2.7% compound annual rate from 2013-17, 33rd in the R46.
Following brisk trade during the third quarter when
a total of 15 $2 million or greater trades were
closed the pace of property exchanges cooled
during 4Q12. Fourth quarter sales proceeds were
about $77.8 million in 7 transactions, down from
$151.8 million during 3Q12, and averaged
$38,784 per unit, up from 3Q’s $36,103 metric.
Cap rates for 25-year old and younger institutional
quality properties gravitated in the high-5% to high
-6% range. Older properties exchanged hands at
8% to 10% yields.
The Bristol (Southwest submarket), a 211-unit
garden project constructed in 2005, was the
youngest asset to trade. The property fetched a
$17.1 million price, translating to $81,042 per
unit. We estimate a 6.0% cap rate.
Employing a 6.3% generic purchase cap rate
(6.9% terminal) RCR models estimate a 7.8% expected annual unlevered total return from metro
assets, ranking 23rd among the R46. Economic
and rent volatility is below group average, giving
rise to an 18th ranked risk-adjusted index of 3.89.
Metro Occupancy Rate
97%
RED 46 AVERAGE
96%
INDIANAPOLIS
95%
94%
93%
92%
91%
90%
89%
4Q 06
4Q 07
4Q 08
4Q 09
4Q 10
4Q 11
4Q 12
4Q 13
4Q 14
4Q 15
4Q 16
Average Cap Rate
9.0%
I NDI A NAPOLI S
EA ST NO CENT R EGI ON
8.0%
7.0%
6.0%
5.0%
5. 8%
6.9%
8. 2%
4Q10
1Q11
2Q11
7. 7%
6. 6%
6.5%
1Q12
2Q12
5. 9%
5. 8%
4.0%
3Q11
4Q11
3Q12
4Q12
1Q13
Annual Chg (000)
30
20
10
0
-10
-20
-30
-40
-50
I NDY
2008
2009
2010
2011
2012
2013f
2014f
2015f
2016f
2017f
(1. 9)
(41. 5)
(1. 8)
17. 5
25. 3
16. 3
17. 3
17. 8
15. 7
12. 5
Property Class/
Type (Constr.)
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated
Cap Rate
The Bristol Apts. (Southwest)
Runaway Bay (West)
B+/GLR (2005)
A-/GLR (2002)
25-Nov-2012
19-Oct-2012
$17.1
$15.8
$81,043
$82,042
6.0%
6.3%
Heart’s Landing (Far Northeast)
C+/AFF (1968)
13-Dec-2012
$15.0
$41,667
7.5%
International Village (West)
B-/GLR (1969)
1-Feb-2013
$11.2
$26,291
10.0%
RED CAPITAL Research | April 2013
6.0%
YoY Rent Trend
4.5%
3.0%
1.5%
0.0%
-1.5%
RED 46 AVERAGE
-3.0%
4Q 06
4Q 07
4Q 08
4Q 09
4Q 10
4Q 11
INDY (REIS/RCR)
4Q 12
4Q 13
INDY (AXIOM)
4Q 14
4Q 15
4Q 16
Y-o-Y % Change
Source: FHFA Home Price Index
10.0%
7.5%
5.0%
2.5%
0.0%
-2.5%
-5.0%
-7.5%
-10.0%
-12.5%
2006
2007
2008
2009
2010
U. S. A .
INDIANAPOLIS
2011
2012
Sources: BLS , INSITUTE FOR ECONOMIC COMPETITIVENESS & RCR
4.5%
Y-o-Y % Change
3.0%
1.5%
0.0%
-1.5%
-3.0%
U.S.A.
-4.5%
INDIANAPOLIS
-6.0%
2008
2009
2010
2011
2012
2013f
2014f
2015f
2016f
RED CAPITAL Research | April 2013
SUBMARKET TRENDS
Effective Rent
Submarket
4Q11
Physical Vacancy
4Q12
Change
4Q11
4Q12
Change
$806
$806
-0.1%
7.1%
4.9%
-220 bps
Castleton
$731
$754
3.2%
4.3%
4.4%
10 bps
Central
$841
$865
2.9%
3.8%
4.1%
30 bps
East
$556
$564
1.5%
8.1%
10.4%
230 bps
Far Northeast
$574
$595
3.7%
7.4%
8.4%
100 bps
Far Northwest
$655
$682
4.1%
4.0%
4.1%
10 bps
Hamilton County
$814
$847
4.0%
6.4%
5.6%
-80 bps
$606
$623
2.7%
4.7%
3.3%
-140 bps
Johnson County
$634
$654
3.1%
5.5%
3.5%
-200 bps
Near Northwest
$597
$615
2.9%
5.5%
5.6%
10 bps
Southeast
$629
$647
2.9%
7.0%
6.8%
-20 bps
Southwest
$620
$649
4.8%
5.0%
4.4%
-60 bps
West
$572
$589
3.0%
7.5%
6.4%
-110 bps
$660
$682
3.3%
6.0%
5.6%
-40 bps
Metro
Total Return
12%
I NDY (R A I =3. 89)
R ED 46 AV G. (R AI =3. 40)
10%
7.3%
8%
6%
6.2%
4.6%
8.3%
8.4%
9.7%
10.1%
7.2%
5.9%
3.9%
4%
2%
0%
90%
70%
50%
30%
10%
RED CAPITAL GROUP
[email protected]
614-857-1416
Kenneth H. Bowen, President, Red Mortgage Capital, LLC
[email protected]
800-837-5100
Multifamily Housing Update 1Q12 May 2012
Payroll Job Summary
Total Payrolls
876.4m
Annual Change
+11.4m
2012 Forecast
+11.0m
2013 Forecast
+13.4m
2014 Forecast
+16.5m
2015 Forecast
+17.9m
Unemployment
8.2% (Mar)
Vacancy Rate Summary
Vacancy Rate (Reis)
5.6%
RED 50 Rank
36th
Annual Chg (Reis)
<1.9%>
RCR YE12 Forecast
5.6%
RCR YE13 Forecast
5.9%
RCR YE14 Forecast
6.2%
RCR YE15 Forecast
6.4%
Mean Rent (Reis)
$668
Annual Change
2.8%
RED 50 Rank
24th
RCR YE12 Forecast
3.2%
RCR YE13 Forecast
2.8%
RCR YE14 Forecast
2.7%
RCR YE15 Forecast
2.8%
$5mm+ Sales
4
Approx. Proceeds
$59.4mm
Median Cap Rate
5.9%
Avg. Price/Unit
$47,404
7.8%
RED 45 ETR Rank
12th
Risk-adjusted Index
3.21
RED RAI Rank
21st
The tempo of metro employment growth accelerated during the first quarter from 4Q11’s sluggish
7,000-job, 0.8% rate. Establishments hired at a
11,400-job, 1.3% year-over-year pace during
1Q12, representing the strongest performance
recorded in 12 months. The business and hospitality service sectors led the charge, adding positions at a collective 10,300-job annual rate, up
from 4Q11’s 7,600-job advance. These gains
were partially offset by weakness in consumer
driven industries as retail trade and financial ser-
vices establishments trimmed 5,100 positions.
Seasonally-adjusted data also were constructive.
This series indicates that a net of 8,700 payrol
jobs were created from January to March, representing the largest quarterly add since 2006.
The RCR payroll model projects steady moderate
growth over the next several years. Net job growth
ranging from 11,000 and 18,000 jobs per year
through 2015 is in the cards, returning Indy to its
2007 peak employment level by late-2013.
Leasing agents got off to a flying start in 2012,
booking a net of 484 net new tenants. Although
1Q12 absorption did not surpass the 569- and
751-unit 4Q11 and 1Q11 performances net demand easily outpaced the 13-year first quarter
average of –130 units. As supply during the period was negligible, occupancy improved 50 basis
points sequentially to 94.4%, an 11-year high.
Nine of 12 submarkets chalked down sequential
quarter occupancy rate gains, the exceptions being East (-1.0%); Far Northwest (0.1%); and Far
Northeast (unchanged). Westside properties garnered the greatest tenant interest as Near Northwest, Southwest and West combined to achieve a
net gain of nearly 270 leased tenants.
While metro occupancy increased 190 bps over
the past year, RCR models suggest the further
gains will be harder to achieve. With supply
pegged to return to 2009 levels this year and rise
again in 2013 and 2014, average occupancy is
likely to struggle to surpass the 94.5% threshold
and may again return to sub- 94% levels by 2014.
1Q12 Rent Trends
Rent trends were exemplary during the winter
quarter as asking and effective rents increased $6
(0.8%) and $8 (1.2%), respectively, from December to March to $702 and $668, according to
Reis. The sequential changes were the largest
recorded in this market in nearly five years.
Expressed on a year-on-year basis, effective rents
increased at a 2.8% rate, up from 2.5% in the
fourth quarter 2011. The 1Q12 metric topped the
RED 50 arithmetic mean by 40 bps, ranking 24th
among the group with respect to annual growth.
Effective rents increased quarter-to-quarter in
each metro submarket save East and Boone/
Hendricks Co, where average rents fell $1 (0.2%)
and $3 (-0.4%), respectively. Conversely, gains
greater than 2% were notched in the Hancock/
Shelby and Southwest areas, and greater than
1.5% in three submarkets, including Hamilton Co.
Stalling occupancy gains and moderate personal
income growth will constrain rent growth over the
next several years. Our models indicate that annual gains will fall below the 3% level after 2012.
Trade activity was moderately slower as four properties valued at $5 million or more exchanged
hands during 1Q12. Proceeds totaled $59.4 mm,
representing an average of $47,404 per unit.
These data compare to eight consummated transactions during 4Q11 for a total of approximately
$79.3mm and average price of $23,800 per unit.
Trade remained largely confined to class B and B–
garden properties dating to the 1970s and 1980s,
including affordable housing and bank real estate
owned. Consequently, observed cap rates were
considerably higher than the levels encountered in
the primary markets, ranging from the low-7%
area to above 10%.
For valuation purposes, RCR believe a 7.0% rate is
a good proxy for institutional quality assets in this
market. Employing this generic level; a 7.7% exit
cap rate and our occupancy and rent forecasts,
we estimate an 7.8% expected total rate of return
and a 3.21 RAI. These metrics rank 12th and
21st highest, respectively, among the RED 46.
Metro Vacancy Rate Trends
Metro Vacancy Rate
Source: Reis, Inc. History, RCR Forecasts
12%
11%
10%
9%
8%
7%
6%
5%
4%
3%
INDIANAPOLIS ABC
RED 46
INDY CL-A
INDY CL-B&C
5.9%
5.6%
6.1%
6.3%
4.9%
6.4%
1Q 06
1Q 07
1Q 08
1Q 09
1Q 10
1Q 11
1Q 12
1Q 13
1Q 14
1Q 15
1Q 16
Average Cap Rate
9.0%
I NDI A NAPOLI S
EAST NO CENT R EGI ON
8.0%
7.0%
6.0%
8.2%
5.0%
6.2%
6.7%
3Q10
4Q10
6.1%
5.4%
5.9%
4Q11
1Q12
4.0%
1Q10
2Q10
1Q11
2Q11
3Q11
Annual Chg (000)
Source: BLS Data, RCR Forecasts.
20
10
0
-10
-20
-30
-40
-50
I NDI ANA POLI S
04
05
06
07
08
09
10
11
12f
13f
14f
15f
12. 2
10. 2
14. 5
13. 9
- 1. 9
- 41. 6
- 1. 7
10. 1
11. 0
13. 4
16. 5
17. 9
Property Class/
Type (Constr)
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated
Cap Rate
Oak Lake Crooked Creek (Far Northwest)
B/GLR (1988)
17-Jan-2012
$12.8
$66,406
6.5%
Emerson Lakes /REO/ (Southeast)
B-/GLR (1988)
16-Mar-2012
$12.6
$35,800
7.7%
Lakes of Carmel (Hamilton County)
Stone Lake Lodge (Southwest)
B/GLR (1987)
B-/AH (1976)
30-Mar-2012
12-Dec-2011
$25.5
$12.8
$78,700
$19,700
7.0%
10.0%
RED CAPITAL Research | May 2012
Source: Reis, Inc., RCR Forecasts
8%
YoY Rent Trend
6%
4%
2%
3.2%
0%
3.1%
2.7%
2.8%
-2%
-4%
RED 46 AVG
-6%
INDIANAPOLIS
-8%
1Q 06
1Q 07
1Q 08
1Q 09
1Q 10
1Q 11
1Q 12
1Q 13
1Q 14
1Q 15
1Q 16
Metro Median Single-Family Home Prices
Source: FHFA Home Price Index
Y-o-Y % Change
12%
9%
6%
USA
INDIANAPOLIS
3%
0%
-3%
-6%
-9%
-12%
2006
2007
2008
2009
2010
2011
Source: BLS Data, RCR Forecasts
Y-o-y Growth Rate
2%
1%
0%
-1%
INDIANAPOLIS
-2%
USA
-3%
2010
2011
2012f
2013f
2014f
RED CAPITAL Research | May 2012
SUBMARKET TRENDS
Effective Rent
Submarket
Boone / Hendricks
Castleton
Central
East
Far Northeast
Far Northwest
Hamilton County
Hancock / Shelby
Johnson County
Near Northwest
Southeast
Southwest
West
Metro
Physical Vacancy
1Q11
1Q12
Change
1Q11
1Q12
Change
$798
$729
$823
$552
$573
$647
$796
$605
$623
$587
$618
$613
$563
$646
$803
$741
$855
$555
$582
$666
$828
$620
$639
$599
$633
$633
$578
$666
0.7%
1.7%
3.9%
0.6%
1.7%
2.9%
4.0%
2.5%
2.5%
2.1%
2.5%
3.3%
2.7%
3.1%
5.4%
6.1%
4.5%
7.5%
10.1%
4.5%
9.0%
6.5%
5.4%
6.3%
8.9%
7.0%
9.6%
8.6%
7.2%
4.1%
3.4%
9.1%
7.5%
4.0%
6.2%
4.3%
4.9%
5.0%
6.5%
4.3%
6.6%
6.4%
180 bps
-200 bps
-110 bps
160 bps
-260 bps
-50 bps
-280 bps
-220 bps
-50 bps
-130 bps
-240 bps
-270 bps
-300 bps
-220 bps
RED CAPITAL GROUP
Daniel J. Hogan
Director of Research
[email protected]
614-857-1416
Kenneth H. Bowen
President, Red Mortgage Capital, LLC
[email protected]
800-837-5100
Indianapolis, IN
Multifamily Housing Update 2Q11 September 2011
Payroll Job Summary
Total Payrolls:
869.8m
Annual Change:
-5.5m
2011 Forecast
+1.2m
2012 Forecast
+16.0m
2013 Forecast
+10.0m
Job creation trends stumbled during the summer
after showing promise earlier in the year. Payrolls
declined at a 5,500-job rate in 2Q, and conditions
deteriorated to 6,500– and 10,300-job annual
losses in July and August, respectively. The principal culprits were retail trade, administrative business services and government, which combined
for attrition of 9,700 jobs y-o-y in August.
Unemployment
8.3% (August)
RCR expect metro payroll growth to rebound in the
fall as the U.S. economy emerges from the sum-
Vacancy Rate Summary
Vacancy Rate (Reis)
6.9%
RED 50 Rank
35th
Annual Chg (Reis)
-2.7%
RCR YE11 Forecast
7.7%
RCR YE12 Forecast
7.8%
Weaker job creation trends in the spring didn’t sap
the strength of the Indy apartment market. Tenants net leased 862 units during the period, up
from 751 move-ins during 1Q11. Conversely, the
metro’s active development community delivered
269 units during the quarter, holding sequential
quarter average occupancy rate improvement to
60 basis points, from 92.5% to 93.1%.
RCR YE13 Forecast
7.7%
Occupancy increased sequentially in every metro
submarket. Outsized gains were posted by the
affordable East submarket (200 bps) and the
2Q11 Rent Trends
Mean Rent (Reis)
$654
Annual Change
2.8%
RED 50 Rank
11th
Rent growth fell short of 1Q11’s $6 (0.9%) sequential quarter effective rent surge but was solidly positive nonetheless. Average rents increased
$4 (0.6%) sequentially to $654, representing the
fifth consecutive quarterly gain of 0.6% or more.
RCR 2011 Forecast
1.8%
RCR 2012 Forecast
1.8%
RCR 2013 Forecast
2.4%
CAGR 2011 –15
2.1%
This string of strong revenue growth resulted in a
second consecutive year-over-year growth metric
of 2.8%. The figure was good enough to rank Indy
an impressive 11th among the R50 on this count,
easily the best result among the Midwest markets.
$5mm+ Sales
Real Capital Analytics report that investors closed
on eight investment sales transaction valued at a
total of $70mm. The average price per unit was
$56,715. This compares to only one transaction
for $6.3mm in the same period of 2010.
Approx. Proceeds
8
$70.0mm
Cap Rate (T12 Med)
Avg. Price/Unit
5.3%
$56,715
Expected Total Return 5.0%
RED 46 Rank
37th
Trades were focused on solid class-B+ suburban
garden projects and distressed repositioning
plays. Two Southside projects meeting the former
description closed in August at cap rates in the
low– to mid-7% range. A 772-unit distressed situ-
mer doldrums. But our latest forecast of a 1,200job net add this year now seems overly-optimistic
(it requires an average monthly y-o-y gain of 8,000
jobs from September to December. A flat to moderately negative total now seems more likely.
Next year should be better, however, as an export
led recovery puts about 16,000 net workers on
payrolls in 2012. The following year should be
constructive as well as we expect metro establishments to create about 10,000 jobs in 2013.
Southwest submarket (90 bps). Demand was especially robust in upscale Hamilton County, where
consumers readily absorbed 269 new Fishers, IN
units and two score more.
Reis expect tenants to absorb another 1,044 units
in 2H11 and 1,371 in 2012, raising occupancy
140 bps by YE12 to 93.9%. RCR models suggest a
weaker outcome is more probable, as balanced
supply and demand conditions hold average occupancy steady around the low 92% area through
the middle of the decade.
Hamilton and West submarkets were standouts,
posting 1.0% and 0.9% gains, respectively. Peripheral county rents skidded, however, as prices in
Boone, Hendricks, Shelby and Hancock declined.
Reis expect rents to rise 4.1% in 2011, followed by
3.7% and 3.4% advances in 2012 and 2013. RCR
models are much less optimistic; forecasting
1.8%, 1.8% and 2.4% gains in the comparable
periods, owing to the model’s expectation of only
modest income growth during the period.
ation traded in June, with the investor accepting a
sub-6% initial yield before rehab costs.
Employing an 6.25% acquisition cap rate, RCR
estimate that the expected five-year un-levered
total return for Indy assets is 5.0%, 37th highest
among the RED 46. In regard to risk-adjusted
returns, assets rank 24th. Metro assets have a
90% probability of delivering a return of 1.2% or
better, but offer a soft 10% upside probability return of only 6.6% or higher.
Apartment Vacancy Trends
12.0%
Metro Vacancy Rate
INDIANAPOLIS
INDIANAPOLIS FORECAST
RED 46
Source: Reis, Inc., RCR Forecasts
11.0%
10.0%
9.0%
7.8%
6.9%
8.0%
7.0%
6. 3%
7.7%
5. 9%
5. 7%
6.0%
5.0%
4.0%
1Q 05
1Q 06
1Q 07
1Q 08
1Q 09
1Q 10
1Q 11
1Q 12
1Q 13
Average Cap Rate
Metro Multifamily Cap Rate Trends
Sources: Fannie, Freddie, RCR, Reis & RCA
9.0%
8.5%
8.0%
7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%
FNM / FM C US
FNM / FM C EA ST NO CNTRL REGION
REIS INDY (4Q M VG A VG)
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
06
07
07
07
07
08
08
08
08
09
09
09
09
10
10
10
10
11
11
Payroll Employment Growth
30
Source: BLS Data & RCG Research Forecast
Annual Chg (000)
20
16.0
10
10.0
1.2
0
-10
-20
-30
-40
-50
00
01
02
03
04
05
06
07
08
09
10
11f
12f
13f
Lighthouse Landings (Southwest)
Keeneland Crest (Southeast)
Coppertree (West)
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated
Cap Rate
A-
16-Aug-2011
$17.8
$52,976
7.6%
B+
22-Aug-2011
$22.6
$53,250
7.0%
B- (Distressed)
7-Jun-2011
$15.8
$20,479
5.5%
YoY Rent Trend
Apartment Effective Rent Trends
Source: Reis, Inc., RCG Forecasts
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
1Q 05
1Q 06
USA
USA FORECAST
INDIANAPOLIS
INDY FORECAST
1Q 07
1Q 08
1Q 09
1Q 10
1Q 11
3. 4%
3. 5%
1. 8%
1. 8%
2. 4%
1Q 12
1Q 13
1Q 14
3. 4%
Metro Median S ingle Family H o me Pric es
Source: FHFA HPI
15%
Y-o-Y % Change
10%
5%
0%
-5%
-10%
INDIANAPOLIS
-15%
2005
2006
2007
2008
USA
2009
2010
2011
Rate
Year-over-year Payroll Growth Rate
Source: BLS, RCG Research Forecasts
3%
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
-6%
-7%
INDIANAPOLIS
USA
2007
2008
2009
2010
2011f
2012f
2013f
SUBMARKET TRENDS
Submarket
Effective Rent
Physical Vacancy
2Q10
2Q11
Change
2Q10
2Q11
Southwest
Southeast
West
Near Northwest
$601
$614
$548
$578
$616
$619
$568
$589
2.4%
0.9%
3.7%
2.0%
7.8%
9.9%
13.0%
7.5%
6.1%
8.3%
8.9%
6.1%
-170 bps
-160 bps
-410 bps
-140 bps
Far Northwest
$632
$651
3.0%
6.4%
4.2%
-220 bps
East
Castleton
Far Northeast
$547
$716
$554
$555
$729
$573
1.4%
1.7%
3.4%
8.8%
8.4%
11.0%
5.5%
5.7%
9.3%
-330 bps
-270 bps
-170 bps
Central
Boone/Hendricks
Hancock/Shelby
Hamilton County
Johnson County
Metro
$799
$786
$599
$783
$614
$636
$827
$796
$602
$804
$625
$654
3.5%
1.2%
0.5%
2.6%
1.8%
2.8%
8.1%
8.6%
8.0%
13.0%
7.2%
9.6%
4.0%
5.2%
6.4%
8.7%
5.2%
6.9%
-410 bps
-340 bps
-160 bps
-430 bps
-200 bps
-270 bps
RED CAPITAL GROUP
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
Business Development
[email protected]
614-857-1499
Change
RED CAPITAL GROUP®
Market Overview
Multifamily Housing Update
June 2011
EXECUTIVE SUMMARY
P
ayroll job trends continued
to improve in the first quarter as the pace of annual
hiring accelerated from 4,500 (0.5%)
net new jobs in 4Q10 to 5,700 (0.7%)
new jobs in the first quarter. Faster
job growth was partially attributable
to slowing job losses among construction firms and information service
providers. Combined, the sectors
were responsible for a –1,500 job
year-over-year decline in 4Q10 but
only a –300 job loss in 1Q11. Additionally, retailers added workers at a
robust 1,800 job y-o-y rate in the first
quarter.
Unfortunately, job growth was not
sustained as preliminary data show a
–3,500 (-0.4%) net job decrease in the
twelve-month period ended in April.
The streak of 11 consecutive months
of over-the-year payroll growth was
brought to an end by tumbling business service headcounts. The super
sector added a monthly y-o-y average
of 2,900 jobs from April 2010 to
March 2011 but eliminated –5,300 net
new jobs in the year-ended in April.
According to the BLS’s household
survey, the unemployment rate
plunged from 9.3% in April 2010 to
7.6% in the same month this year.
But the source of the decline was undesirable: about 14,000 individuals
dropped out of the labor force, presumably become discouraged after
unsuccessful job searches.
Although employment data were
weak in April, RED CAPITAL Research (RCR) still expect positive
payroll growth this year and next.
Specifically, our econometric model
produces point estimates of 8,200
(0.9%) new jobs in 2011 and 15,500
(1.8%) new jobs in 2012. Economy.com are similarly optimistic,
projecting gains of 10,200 and 12,200
new jobs in 2011 and 2012, respectively.
SNAP SHOT
Circle City housing market trends
were weak in the first quarter. The
Metropolitan Indianapolis Board of
Realtors count 3,977 home sales in
the first three months of 2011, down
–10.9% from last year’s sales pace.
Furthermore, the median price fell
–0.4% from $113,500 to $113,000.
The inventory of homes for-sale also
decreased, falling from 17,217 in
March 2010 to 16,906 in March 2011.
Apartment demand remained firm,
contributing to a 50 basis point increase in occupancy from 92.0% in
4Q10 to 92.5% in 1Q11. Property
managers net leased 751 units during
the quarter, comparing favorably to
the 281 units absorbed in same period
of 2010. Moreover, only 150 units
were added to the metro’s rental
stock, down from a 356-unit quarterly
average observed last year.
Rising occupancy contributed to
stronger rent growth. The average
effective rent increased 0.9% sequentially, the fastest quarterly gain observed since 2Q08 (1.1%). As a result, the pace of y-o-y effective rent
growth accelerated from 2.1% in
4Q10 to 2.8% in 1Q11. Falling concessions contributed to effective rent
gains. The size of the average concession package was equal to 5.4% of
asking rent in 1Q11, the metro’s lowest level observed since 3Q08.
Real Capital Analytics were aware of
seven transactions involving properties priced at or above $5 million in
the six-month period ended in March.
Sales volume totaled $64.1 million
and the average price per unit was
$57,573. CB Richard Ellis conclude
that cap rates for stabilized Class-A
Indianapolis properties ranged from
6.0% to 6.5% in February. Based an
assumed cap rate in the middle of the
range (6.25%) RCR calculate an
11.2% expected rate of total return,
fifth highest in the RED 50.
Vacancy
(7.5% - 1Q11)
Effective
Rents
Y-o-y
Projected
change
2011
260bps
70bps
2.8%
4.3%
($650 - 1Q11)
Cap Rate
(N/A - 1Q11)
N/A
Employment
(858.3m - 1Q11)
6.4m
8.2m
KEY POINTS
 The
metro vacancy rate fell 50 basis points
sequentially to 7.5% as apartment demand
(751 units) outpaced supply (150 units) in
the first three months of 2011. Measured on
an annual basis, Class-A vacancy plunged
230 basis points to 6.2% and Class B/C
vacancy shed 280 basis points to 8.5%.
 Rent
trends improved in the first quarter.
Class B/C asking rent rose 0.8% and Class-A
asking rent advanced 0.6% sequentially in
the first quarter. Year-over-year effective
rent growth accelerated to 2.8%, the fastest
increase since 3Q08 (+3.7%).
 Home
sales activity and prices declined in
the first quarter. Data from the Metropolitan
Indianapolis Association of Realtors show
that sales velocity fell –10.9% and the
median price decreased –0.4% year-overyear in 1Q11.
 According
to Real Capital Analytics,
multifamily asset sales volume totaled $64.1
million in the six-month period ended in
March.
 At
an assumed 6.25% going-in yield, RCR
calculate an 11.2% expected return, fifth
highest among the RED 50.
Indianapolis-Carmel, Indiana MSA - Q1 2011
VACANCY TRENDS
 The metro vacancy rate decreased 50 basis points sequentially and 260
 Vacancy among Class-A assets fell 40 basis points quarter-to-quarter
to 6.2%. By comparison, Class B/C vacancy fell 70 basis points to
8.5%.
 Each of the metro’s 13 submarkets experienced year-over-year vacancy
Metro Vacancy Rate
basis points year-over-year to 7.5% in the first quarter. Robust
apartment demand contributed to the improvement. Positive net
absorption totaled 751 units during the first quarter and 3,982 units in
the year-ended in March.
Source: Reis, Inc.
12%
10.1%
10%
7.5%
8%
6%
4%
Indianapolis
U.S.A.
2%
0%
rate declines in the first quarter.
 Reis expect vacancy to fall 70 basis points to 6.8% by year-end.
1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q
00 01 02 03 04 05 06 07 08 09 10 11
th
RANK: 38 out of 50
RENT TRENDS
Metro Rent Trends
 Property managers generated stronger rent growth in the first quarter.
Source: Reis, Inc.
 The size of the average concession package fell to 5.4% of asking rent
in the first quarter, approximately equal to 0.6-months free-rent on a
twelve-month lease.
 The strongest over-the-year effective rent gain (6.3%) was observed in
the Far Northeast submarket. Assets in the Central (4.6%), Far
Northwest (3.9%) and Castleton (3.2%) submarkets also produced
above average rent growth.
YoY Rent Trend
The average effective rent advanced 0.9% sequentially and 2.8% yearover-year to $650. By comparison, effective rent was up 2.1%
annually in the previous period.
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
 Reis expect the pace of annual effective rent growth to accelerate to
Asking
Effective
2.8%
2.5%
1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q
00 01 02 03 04 05 06 07 08 09 10 11
4.3% by year-end. But rent growth will decelerate to 4.0% in 2012.
RANK: 16th out of 50
Metro Multifamily Cap Rate Trend
PROPERTY MARKET & CAP RATE TRENDS
Source: Reis, Inc.
 Real
 CB
Richard Ellis estimate that cap rates for stabilized Class-A
properties ranged from 6.0% to 6.5% in February. Similarly, the
source reports stabilized Class-B cap rates ranging from 6.5% to 7.0%
in the month.
 Based on a 6.25% assumed going-in yield, RCR calculate an 11.2%
expected rate of total return, fifth highest among the RED 50.
Similarly, Indianapolis registered a 5.03 risk-adjusted index, 12th
highest in the group.
9%
8%
Cap Rate
Capital Analytics identify seven investor-grade trades totaling
$64.1 million in sales proceeds closed during the six-month period
ended in March. The source calculates an average price per unit of
$57,573. Loopnet.com identify two 1Q11 sales at an average price per
of $50,996.
7%
6%
5%
4%
3%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
09
09
09
09
10
10
10
10
11
Property Name
Woodbrook
Washington Quarters
RED CAPITAL Research
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
B/C
A
March 2011
March 2011
$5.1
$18.0
$25,765
$70,313
11.0%
7.3%
Metro Median Single Family Home Prices
DEMOGRAPHICS & HOUSING MARKET
Source: National Association of Realtors
$220
MSA
 The population of the Indianapolis-Carmel MSA increased at a 1.4%
US
compound average annual pace from 2000 to 2010. Hamilton (4.2%)
and Hendricks (3.4%) counties produced the fastest gains.
Prices (000)
$200
 Housing market data were weak in the first quarter.
$180
According to the
National Association of Realtors, the median price of a single-family
MSA home decreased –4.4% year-over-year from $115,000 to
$109,900 in 1Q11.
$160
$140
 Similarly, the Metropolitan Indianapolis Board of Realtors report that
$120
median home prices edged –0.4% lower to $113,000 as the bid-ask
spread widened from 9.7% in 1Q10 to 11.0% in 1Q11.
$100
08
09
10
Y
Y
Y
 Moreover, sales activity plunged –10.9% year-over-year as only 3,977
1Q 2Q 3Q 4Q 1Q
10
10
10
10
metro homes were sold in the first three months of 2011.
11
EMPLOYMENT TRENDS
Non-Seasonally Adjusted
30
15.5
8.2
Annual Chg (000)
20
10
0
-10
ated in 1Q11, comparing favorably to the 4,500 (0.5%) jobs added in
the fourth quarter. The improvement was largely attributable to an
increase in store headcounts. After adding only 100 jobs year-overyear in 4Q10, retailers added 1,800 positions to payrolls in 1Q11.
 According to preliminary data, payroll growth was not sustained in
-20
April as metro employment levels dipped –3,500 (-0.4%) over-theyear. Weakness among business service employers was largely to
blame. Super-sector payrolls fell –5,300 year-over-year in April,
following twelve consecutive monthly year-over-year advances.
-30
-40
-50
00 01 02 03 04 05 06 07 08 09 10 11f 12f
Seasonally-Adjusted
Source: BLS
6%
 Seasonally-adjusted
payroll data also were weak. During the first
four months of 2011, establishments eliminated –400 positions from
payrolls. By comparison, job counts rose 3,700 during 2010.
Indianapolis
USA
4%
 The metro unemployment rate declined rapidly, fueled by modest job
growth and a declining labor force. Indeed, the size of the labor force
contracted –1.6% while total employment (from the BLS’s household
survey) rose 0.3% in the year-ended in April.
2%
Rate
 The pace of annual hiring accelerated as 5,700 (0.7%) jobs were cre-
Forecast
0%
 RCR expect Indianapolis job growth
to accelerate to 8,200 (0.9%)
jobs this year and 15,500 (1.8%) in 2012.
-2%
-4%
 Economy.com
project similar gains of 10,200 and 12,200 net new
jobs in 2011 and 2012, respectively.
-6%
-8%
00 01 02 03 04 05 06 07 08 09 10 11
RANK: 33rd out of 50
RED Estimated Generic Unlevered Asset Total Return Probabilities
15%
10%
Indianapolis
8.2%
6.0%
Colum bus
10.0%
11.1%
7.7%
12.3%
8.8%
9.9%
13.9%
11.5%
5%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Effective Rent
Physical Vacancy
Submarket
1Q10
1Q11
Change
1Q10
1Q11
Southwest
Southeast
West
Near Northwest
Far Northwest
East
Castleton
Far Northeast
Central
Boone / Hendricks
Hancock / Shelby
Hamilton County
$599
$609
$556
$574
$622
$539
$706
$539
$787
$783
$592
$780
$613
$618
$563
$587
$647
$552
$729
$573
$823
$798
$605
$796
2.2%
1.4%
1.3%
2.1%
3.9%
2.5%
3.2%
6.3%
4.6%
1.9%
2.1%
2.1%
9.2%
11.0%
13.3%
8.7%
7.0%
8.7%
8.4%
11.7%
4.8%
10.1%
10.2%
12.0%
7.0%
8.9%
9.6%
6.3%
4.5%
7.5%
6.1%
10.1%
4.5%
5.4%
6.5%
9.0%
Johnson County
$617
$623
1.1%
8.0%
5.4%
-260 bps
Metro
$632
$650
2.8%
10.1%
7.5%
-260 bps
-220 bps
-210 bps
-370 bps
-240 bps
-250 bps
-120 bps
-230 bps
-160 bps
-30 bps
-470 bps
-370 bps
-300 bps
Completions and Absorption
SUPPLY TRENDS
Source: Reis, Inc
 Apartment developers completed one project in the first five months of
4,000
2011. The 150-unit mid-rise project opened in the Hamilton County
submarket in February.
 The development pipeline was well-stocked.
1,000
0
Reis count 23 apartment
developments (4,542 units) in the planned or proposed phase.
-1,000
 Additionally, 685 condo units were planned / proposed phase and 496
-2,000
condo units were under construction in May.
William T. Hinga
[email protected]
614-857-1499
Absorption
2,000
Units
were aware of seven apartment projects under construction in
May, totaling 1,072 units. Four of the sites are located in the Central
(369 units) submarket, two are in the Hamilton County (445 units)
submarket and the remaining property is in the Boone / Hendricks (213
units) submarket.
Completions
3,000
 Reis
Daniel J. Hogan
[email protected]
614-857-1416
Change
04
05
06
07
08
09
10 11f 12f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
www.redcapitalgroup.com
800.837.5100
©2010 RED CAPITAL GROUP
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to
buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no
circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any
reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views
expressed herein are subject to change without notice due to market conditions and other factors.
RED CAPITAL GROUP®
Market Overview
November 2010
EXECUTIVE SUMMARY
C
ircle City job trends improved in the third quarter
as the pace of annual payroll job attrition decelerated from
–8,400 (-0.9%) in 2Q10 to –200 in
3Q10. Better job prospects in the
business, education and health service
sectors were largely responsible. In
2Q10, the sectors were responsible for
a 7,800-job gain but the pace of
growth accelerated to 11,700 jobs yo-y in the third quarter. Additionally,
job losses among construction, manufacturing and financial service firms
slowed to –6,600 in 3Q10.
Seasonally-adjusted data show that
2,000 positions were added to payrolls during the third quarter, comparing favorably to the 1,700-job advance recorded in 2Q10. Based on
the Manpower Employment Outlook
Survey, sequential quarter job growth
will remain positive in the fourth
quarter. Among companies surveyed
in September, 16% expressed plans to
add workers in 4Q10, double the
number of firms that anticipate contraction (8%).
Economists at the Indiana University
Business Research Center are optimistic about job growth. The group
predicts that Hoosier state employment will rise about 2% next year.
Moreover, Indianapolis MSA job
counts are forecast to increase by 2%
to 3% in 2011. The RED CAPITAL
Research (RCR) econometric payroll
model is less constructive, however.
We expect slower growth of 10,200
(1.2%) jobs in 2011, followed by a
robust gain of 21,600 (2.5%) jobs in
2012.
Recent data show that home prices
remained firm, despite a sharp decrease in sales velocity. The Metropolitan Indianapolis Board of Realtors, report that the median home
price increased 0.7% y-o-y from
$123,000 in 3Q09 to $123,800 in
SNAP SHOT
3Q10. But the number of closed sales
plunged –23.7% from 6,744 to 5,147
and pending sales fell –22.1% y-o-y
to 5,597.
As home sales slowed, apartment
demand surged. Indeed, property
managers net leased 1,385 units during the third quarter, producing a 130
basis point sequential increase in occupancy from 90.4% in 2Q10 to
91.7% in 3Q10. Tenant demand was
particularly strong for Class-A properties (794 units) as occupancy surged
160 basis points to 92.9%. By comparison, Class B/C occupancy increased 100 basis points sequentially
to 90.7%.
Newly constructed properties enjoyed
rapid lease-up. According to Reis, a
402-unit property that was completed
in June was 68.4% occupied in September. Moreover, a 218-unit asset
that was delivered in April was 95.4%
occupied in September. As a result,
Reis predict that the delivery of 1,266
units will result in only a 10 basis
point occupancy decline next year.
Rent trends also were positive in the
third quarter. The average effective
rent advanced 0.6% sequentially to
$640. As a result, the pace of y-o-y
effective rent growth accelerated from
0.3% to 1.6%. Reis expect effective
rent growth to improve to 1.9% in
4Q10 and to 2.2% next year.
Property transaction activity slowed
this year. Real Capital Analytics
identified only four sales transactions
in the first nine months of 2010. Asset sales volume totaled $19 million,
–89% below the tally recorded in the
same period of 2009. Loopnet.com
list six investor-grade properties forsale in November. Highlighting the
offerings was a 2001-vintage garden
property located in the Southwest
submarket. The broker report a 7.6%
pro forma cap rate based on a $19
million asking price.
Y-o-y
change
Vacancy
(8.3% - 3Q10)
Effective
Rents
100bps
Projected
2010
20bps
1.6%
1.9%
0.2m
7.6m
($640 - 3Q10)
Cap Rate
(6.3% - 3Q10)
Employment
(870.8m - 3Q10)
KEY POINTS
 Metro
vacancy decreased 130 basis points
sequentially and 100 basis points year-overyear to 8.3% in 3Q10. Robust tenant
demand was largely responsible. Property
managers net leased 794 Class-A units and
591 Class B/C units from July to September.
 Effective rent increased 0.6% sequentially to
$640 in 3Q10. As a result, annual effective
rent trends improved to +1.6%. Similarly,
the size of the average concession package
fell from 5.8% of asking rent in 3Q09 to
5.6%.
 Reis
predict that vacancy will rise 20 basis
points and effective rent will advance $3
(0.5%) in 4Q10.
 According
to the National Association of
Realtors, the median price of a single-family
MSA home increased 2.6% year-over-year
from $120,200 in 3Q09 to $123,300 in
3Q10.
 Real Capital Analytics estimate sales volume
of $19 million in the first nine months of
2010. Only one transaction was recorded in
the third quarter. The property sold for
$14.5 million or $50,295 per unit.
VACANCY TRENDS
 The metro vacancy rate decreased 130 basis points sequentially from
 Apartment demand was stout for Class-A and Class B/C units.
The
average Class-A vacancy rate fell 160 basis points sequentially to 7.1%
as positive net absorption totaled 794 units. Class B/C managers net
leased 591 units, resulting in a 100 basis points decrease in vacancy
from 10.3% in 2Q10 to 9.3% in 3Q10.
Metro Vacancy Rate
9.6% in 2Q10 to 8.3% in 3Q10, owing to robust tenant demand.
Property managers net leased 1,385 units during the third quarter,
comparing favorably to the 1,374 units absorbed in the first six months
of the year.
Source: Reis, Inc.
12%
10%
9.3%
8.3%
8%
6%
4%
Indianapolis
U.S.A.
2%
0%
 Reis expect vacancy to increase 20 basis points to 8.5% in 4Q10 and
3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q
another 10 basis points to 8.6% in 2011.
00 01 02 03 04 05 06 07 08 09 10
RENT TRENDS
Metro Rent Trends
Source: Reis, Inc.
the advance recorded in the previous quarter. As a result, the pace of
year-over-year effective rent growth accelerated from 0.3% in 2Q10 to
1.6% in 3Q10.
 Class-A asking rent increased 0.4% sequentially from $773 in 2Q10 to
$776 in 3Q10. By comparison, Class B/C asking rent advanced 0.5%
sequentially to $597.
 The average effective rent in the Far Northeast submarket surged 6.7%
year-over-year to $566 in 3Q10.
 Reis expect that the pace of year-over-year effective rent growth will
YoY Rent Trend
 The average effective rent increased 0.6% sequentially, on pace with
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
Asking
Effective
1.6%
1.4%
3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q
accelerate to 1.9% in 4Q10 and to 2.2% in 2011.
00 01 02 03 04 05 06 07 08 09 10
th
RANK: 19 out of 50
Source: Reis, Inc.
 Real Capital Analytics identified four apartment transactions involving
 Loopnet.com were aware of six investor-grade properties listed for sale
in November. Among the listings was a Class-A asset located in the
Southwest submarket. Based on the $19 million list price ($56,548 per
unit) the broker calculates a 7.6% pro forma cap rate.
 At an assumed 7.75% going-in yield, RCR expect a 9.7% rate of total
return, ranking fourth highest among the RED 50. Similarly, the
market boasts the 14th highest measure of risk-adjusted return in the
group.
Cap Rate
properties priced at or above $1 million in the first nine months of
2010. Sales volume totaled $19 million, down –89% from the same
period of last year.
8.5%
8.0%
7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
08 08 09 09 09 09 10 10 10
Property Name
Washington Village
Lighthouse Landing Apartments
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
A
September 2010
Listing
$14.5
$19.0
$50,295
$56,548
7.8%
7.6% p.f.
$240
MSA
Prices (000)
$220
 The pace of metro population growth decelerated slightly from 1.4% in
US
2008 to 1.3% in 2009, despite an uptick in positive net domestic
migration (from 6,465 residents to 7,034 residents).
$200
 According to the National Association of Realtors, the median price of
$180
$140
a single-family MSA home increased 2.6% year-over-year from
$120,200 in 3Q09 to $123,300 in 3Q10. Similarly, the source
estimates a $115,800 third quarter median condo price, up 1.2% from
3Q09.
$120
 The Indiana Association of Realtors count 8,183 Marion County sales
$100
in the first ten months of 2010, down –10.3% from 9,127 sales
recorded in the same period of 2009.
$160
07
08
09
Y
Y
Y
3Q 4Q 1Q 2Q 3Q
09
09
10
10
 RealtyTrac.com
calculate a 0.85% 3Q10 metro foreclosure rate,
ranking 53rd highest among the 206 markets tracked by the source.
10
EMPLOYMENT TRENDS
30
21.6
20
Annual Chg (000)
10.2
10
0
 Metro job trends continued to improve in the third quarter.
Indeed,
the pace of year-over-year job loss moderated from –27,700 (-3.2%)
in 1Q10 to –8,400 (-0.9%) in 2Q10. Subsequently, only –200 jobs
were eliminated year-over-year in 3Q10.
 Four large employment sectors (transportation / warehousing,
-10
business services, education / health services, and government) generated
year-over-year job gains in the third quarter, adding a combined net of
12,200 positions to payrolls.
-7.6
-20
-30
 Similarly,
-40
-50
00 01 02 03 04 05 06 07 08 09 10f 11f 12f
financial service headcounts increased 200 jobs in the
twelve-month period ended in September, the first year-over-year
advance since June 2006.
 Data from the BLS’s household survey portray sharper job declines as
total employment plunged –13,383 (-1.6%) in the year-ended in September.
Source: BLS
6%
Seasonally-Adjusted
 Seasonally-adjusted
Indianapolis
USA
4%
payroll trends remained positive from July to
September. Moreover, the pace of growth accelerated from 1,700 net
new jobs in the second quarter to 2,000 jobs during the third quarter.
Rate
2%
Forecast
0%
-2%
 Based on the RCR econometric payroll model, Indianapolis employ-
-4%
ers will add 10,200 (1.2%) jobs in 2011 and 21,600 (2.5%) jobs in
2012. But job losses will persist this year (–7,600, -0.9%).
-6%
-8%
99 00 01 02 03 04 05 06 07 08 09 10
15%
10%
RED Estimated Generic Unlevered Asset Total Return Probabilities 12.7%
Indianapolis
6.3%
5.4%
Colum bus
8.3%
9.6%
7.2%
10.9%
8.4%
9.6%
11.1%
5%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Effective Rent
Physical Vacancy
Submarket
Southwest
Southeast
West
Near Northwest
Far Northwest
East
Castleton
Far Northeast
Central
Boone / Hendricks
Hancock / Shelby
Hamilton County
3Q09
3Q10
Change
3Q09
3Q10
$598
$607
$553
$580
$621
$554
$702
$530
$793
$782
$583
$779
$603
$612
$546
$586
$638
$548
$717
$566
$817
$788
$591
$787
0.8%
0.9%
-1.3%
1.0%
2.7%
-1.1%
2.1%
6.7%
3.0%
0.8%
1.4%
1.0%
8.8%
10.5%
12.4%
9.7%
8.0%
6.3%
8.6%
8.7%
3.5%
7.6%
9.7%
11.5%
6.6%
9.0%
10.9%
6.0%
5.1%
9.5%
7.6%
11.0%
6.9%
5.9%
7.7%
10.2%
Change
-220 bps
-150 bps
-150 bps
-370 bps
-290 bps
320 bps
-100 bps
230 bps
340 bps
-170 bps
-200 bps
-130 bps
Johnson County
$622
$611
-1.7%
7.6%
6.6%
-100 bps
Metro
$630
$640
1.6%
9.3%
8.3%
-100 bps
SUPPLY TRENDS
 Apartment development accelerated last year.
Source: Reis, Inc
Following an average
annual increase of only 511 units from 2005 to 2008, developers
completed 1,639 units in 2009.
In the first ten months of 2010, a
total of 1,031 apartment units were delivered. Two properties were
completed in the Central submarket, adding 235 units to the rental
stock. Units also were completed in the Hamilton County (402 units),
Southwest (298 units) and West (96 units) submarkets.
 Initial leasing conditions were strong.
According to Reis, the 402-unit
Hamilton County property that was completed in June was 68.4%
occupied in September. Additionally, a 218-unit mid-rise property in
the Central submarket was 95.4% occupied in September, only five
months after construction was completed.
 Reis
were aware of six apartment assets under construction in
November. Two of the properties, totaling 272 units, are located in the
Central submarket. The other four properties (812 units) are in the
Hamilton County submarket.
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
Units
 Builders were active again this year.
3,000
2,500
2,000
1,500
1,000
500
0
-500
-1,000
-1,500
-2,000
Completions
Absorption
02 03 04 05 06 07 08 09 10f 11f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
800.837.5100
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or
sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by RED
CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED
cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and
exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice
due to market conditions and other factors.
RED CAPITAL GROUP®
Market Overview
August 2010
EXECUTIVE SUMMARY
C
ircle City job trends improved year-to-date. Payroll employment data show
that employers added 2,900 (0.3%)
jobs in the twelve-month period
ended in July, as compared to a
-41,800 (-4.1%) job average monthly
y-o-y decrease observed in 2009.
Strong demand for business services
was partially responsible for the improvement.
Super-sector payrolls
advanced 14,100 year-over-year in
July, after falling -12,900 in the same
month last year. Additionally, job
conditions in the manufacturing and
retail trade sectors improved as combined y-o-y job losses slowed from
-16,100 in December to -500 in July.
Conversely, total employment figures,
from the BLS’s household survey,
revealed persistent job attrition. Y-oy job losses totaled -30,841 (-3.9%) in
2Q10. As a result, the metro unemployment rate was 9.3% in June, up
from 8.9% from the same month a
year ago.
On a seasonally-adjusted basis, the
pace of payroll job formation accelerated slightly from 1,500 in 1Q10 to
1,700 in 2Q10. Based on preliminary
data, job growth surged to 8,900 in
July.
Although a downward revision to the
July figure is probable, job growth in
the third quarter is likely to outpace
the 2Q10 advance. Indeed, based on
the RED CAPITAL Research
(RCR) econometric payroll model,
non-seasonally adjusted job growth is
forecast to total 1,500 (0.2%) in 3Q10
and 9,200 (1.0%) in 4Q10. As a result, annual job loss will total only
-6,000 (-0.7%) this year and net job
formation will total 15,500 (1.8%) in
2011 and 26,700 (3.0%) in 2012.
Housing prices and homes sales activity rose in the second quarter. The
National Association of Realtors calculate median single-family home
SNAP SHOT
price of $129,900 in 2Q10, up 6.0%
from the $122,500 price observed in
2Q09. Likewise, the Indiana Association of Realtors report that metro
home sales velocity advanced 15.1%
y-o-y as 6,851 homes were sold from
April to June.
Stout tenant demand gave rise to
higher occupancy in the second quarter. Property managers net leased 998
units, outpacing the 620 units added
to the rental stock from April to June.
As a result, the metro occupancy rate
rose from 90.0% in March to 90.4%
in June. Leasing conditions were
strong for Class-A and Class B/C
rentals alike. Marcus & Millichap
estimate that Class-A vacancy decreased 20 bps in the first six months
of the year. Moreover, Class B/C
vacancy decreased 70 bps from 11.0%
in December to 10.3% in June.
Effective rent advanced 0.6% sequentially in 2Q10, marking the third consecutive quarterly gain. As a result,
annual effective rent growth turned
positive (+0.3%) the first time since
1Q09 (+1.0%). Concession levels
fluctuated only slightly over the past
year. The size of the average concession package was 5.8% of asking rent
in 2Q10, down from 5.9% in 2Q09
and up from 5.7% in 1Q10.
After a four-year lull in construction - when supply averaged 511 units per
year -- developers were active in 2009
adding 1,639 units to the rental stock.
Based on an August construction report, Reis were aware of 1,181 units
scheduled for delivery this year, 797
units slated to debut in 2011, and
1,243 units with an estimated completion date in 2012.
Based on an assumed 7.8% going-in
yield, RCR calculate an 8.9% expected rate of total return and a 3.39
risk-adjusted return. The figures rank
5th and 14th, respectively, among the
RED 50.
Y-o-y
change
Projected
YE 2010
110bps
10bps
0.3%
1.3%
8.4m
6.0m
Vacancy
(9.6% - 2Q10)
Effective
Rents
($636 - 2Q10)
Cap Rate
(N/A - 2Q10)
Employment
(868.1m - 2Q10)
KEY POINTS
•
Positive net absorption surged to 998 units in
2Q10, the largest quarterly total since 3Q00.
As a result, vacancy fell 40 basis points from
10.0% in 1Q10 to 9.6% in 2Q10. Still, the
second quarter vacancy rate was up 110
basis points year-over-year, owing to
negative net absorption of 1,188 units in
2H09.
•
Effective rent increased 0.6% sequentially in
2Q10, comparing favorably to the 0.2%
advance observed in the previous quarter.
Likewise, the average asking rent rose 0.7%
from $670 in 1Q10 to $675 in 2Q10.
•
As of August, Reis were aware of two
properties under construction that are
expected to open by year-end. An 150-unit
property in the Hamilton County submarket
is forecast to debut in October. The second
property will add 96 units to the West
submarket in October.
•
According to Real Capital Analytics, sales
volume totaled only $6 million in 1H10 as
only one transaction was completed. The
asset sold for $37,952 per unit. Marcus &
Millichap calculate a median price per unit
of $29,400 in the twelve-month period ended
in June.
Indianapolis - Carmel, Indiana MSA - Q2 2010
VACANCY TRENDS
•
•
•
Positive net absorption of 998 units gave rise to a 40 basis point
sequential decrease in the metro vacancy rate from 10.0% in 1Q10 to
9.6% in 2Q10. On the other hand, vacancy surged 110 basis points
year-over-year as tenants vacated 897 units from July 2009 to March
2010.
Marcus & Millichap report that vacancy among Class-A properties fell
20 basis points from 8.9% in December to 8.7% in June.
Three (West, Hamilton County, and Far Northeast) of the metro’s 13
submarkets experienced vacancy rates above 10% in the second
quarter.
Source: Reis, Inc.
12%
Metro Vacancy Rate
•
10%
9.6%
8.5%
8%
6%
4%
Indianapolis
U.S.A.
2%
0%
2Q 2Q 2Q 2Q 2Q 2Q 2Q 2Q 2Q 2Q 2Q
Reis predict that vacancy will rise to 9.7% by year-end as supply (246
units) outpaces demand (133 units) in 2H10.
00 01 02 03 04 05 06 07 08 09 10
Metro Rent Trends
RENT TRENDS
•
•
•
Source: Reis, Inc.
Effective rent advanced 0.6% sequentially from $632 in 1Q10 to $636
in 2Q10. As a result, year-over-year effective rent growth metrics
turned positive, advancing from -0.6% in the first quarter to 0.3%.
Marcus & Millichap report that asking rent among Class-A properties
increased 0.4% to $749 in the first six months of 2010. By
comparison, Class B/C asking rent advanced 0.9% to $576 during the
period.
At 2.9%, the Far Northeast submarket generated the fastest pace of
year-over-year effective rent growth in 2Q10.
YoY Rent Trend
•
Reis predict that year-over-year effective rent growth will accelerate to
1.3% in 4Q10 and to 1.4% in 4Q11.
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
Asking
Effective
0.3%
0.1%
2Q 2Q 2Q 2Q 2Q 2Q 2Q 2Q 2Q 2Q 2Q
00 01 02 03 04 05 06 07 08 09 10
th
RANK: 24 out of 50
•
•
•
Real Capital Analytics identify only one transaction that closed in the
first six months of 2010. The asset sold for $6 million or $37,952 per
unit.
Marcus & Millichap report a median price per unit of $29,400 in the
twelve-month period ended in June. The source reports that cap rates
for stabilized assets were close to 8.5% at mid-year.
CB Richard Ellis report that cap rates for stabilized Class-A properties
ranged from 6.25% to 7.0% in August. Similarly, yields for stabilized
Class-B assets ranged from 7.0% to 7.5%.
At an assumed 7.8% going-in yield, RCR calculate an 8.9% expected
rate of total return, ranking fifth highest among the RED 50.
Moreover, the market boasts the 14th highest measure of risk-adjusted
return.
8.2%
Cap Rate
•
Source: Reis, Inc.
8.4%
8.0%
7.8%
7.6%
7.4%
2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
08
08 08
09
09 09
09 10
10
Property Name
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
Indianapolis - Carmel, Indiana MSA - Q2 2010
$240
MSA
Prices (000)
$220
•
US
$200
•
$180
$160
$140
•
$120
$100
07
08
09
Y
Y
Y
2Q 3Q 4Q 1Q 2Q
09
09
09
10
•
10
15.5
Annual Chg (000)
20
•
10
0
•
-6
-20
-30
-40
-50
99 00 01 02 03 04 05 06 07 08 09 10f 11f
•
•
Source: BLS
Indianapolis
USA
2%
Rate
The Indiana Association of Realtors report that metro home sales
velocity advanced 15.1% year-over-year as 6,851 homes sold in 2Q10.
The pace of year-over-year job attrition decelerated sharply from
-27,700 (-3.2%) in 1Q10 to -8,400 (-0.9%) in 2Q10. Moreover, employers created 2,900 (0.3%) jobs in the twelve-month period ended
in July.
Business service employers generated strong job growth in recent
months. The super-sector created 14,100 jobs year-over-year in July,
as compared to a -12,900-job decrease in the same month last year.
Additionally, job losses among manufacturing workers slowed from
-10,500 jobs year-over-year in December to only -1,200 jobs yearover-year in July.
The metro unemployment rate was at or above 9% for five of the first
six months of 2010. By comparison, the rate previously had not exceeded the threshold in the 20-year BLS data series.
Seasonally-Adjusted
4%
HousingTracker.net calculate a $144,925 median asking price for
single-family homes and condos in July, down -2.8% year-over-year.
Additionally, the source notes that inventory of homes and condos forsale rose 6.2%.
30
6%
According to the National Association of Realtors, the median price of
a single-family MSA home increased 6.0% year-over-year from
$122,500 in 2Q09 to $129,900 in 2Q10.
EMPLOYMENT TRENDS
-10
Population growth decelerated slightly from 1.4% in 2008 to 1.3% in
2009. Tactician Corporation predict that the metro population will
advance at a 1.4% compound average annual rate between 2009 and
2014.
On a seasonally-adjusted basis, metro employers created 1,700 jobs in
the second quarter, moderately better than the 1,500-job increase
observed in 1Q10. Preliminary data show that 8,900 jobs were added
in July, as compared to a -2,300 job decrease in the same month last
year.
Forecast
0%
-2%
•
-4%
-6%
-8%
99 00 01 02 03 04 05 06 07 08 09 10
•
Based on the RCR econometric payroll model, which assumes strong
domestic economic growth in 2012, Indianapolis employers will add
15,500 (1.8%) jobs in 2011 and 26,700 (3.0%) jobs in 2012, following a modest -6,000 (-0.7%) job decrease this year.
Economy.com project similar growth of 20,230 (2.5%) net new jobs
in 2011 and 29,500 (3.6%) new jobs in 2012.
15%
10%
Indianapolis
5.4%
Colum bus
7.4%
4.4%
5%
6.2%
8.8%
10.2%
7.5%
8.6%
12.0%
10.3%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Submarket
Effective Rent
Physical Vacancy
2Q09
2Q10
Change
2Q09
2Q10
Southwest
Southeast
West
Near Northwest
Far Northwest
East
Castleton
Far Northeast
Central
$604
$607
$562
$579
$635
$541
$699
$539
$802
$601
$614
$548
$578
$632
$547
$716
$554
$799
-0.4%
1.1%
-2.5%
-0.1%
-0.5%
1.1%
2.5%
2.9%
-0.3%
7.8%
8.7%
11.3%
8.7%
7.0%
6.2%
7.7%
9.0%
3.1%
7.8%
9.9%
13.0%
7.5%
6.4%
8.8%
8.4%
11.0%
8.1%
Unchg
120 bps
170 bps
-120 bps
-60 bps
260 bps
70 bps
200 bps
500 bps
Boone / Hendricks
Hancock / Shelby
Hamilton County
$784
$592
$795
$786
$599
$783
0.2%
1.2%
-1.5%
8.1%
10.5%
9.3%
8.6%
8.0%
13.0%
50 bps
-250 bps
370 bps
Johnson County
$616
$614
-0.3%
8.7%
7.2%
-150 bps
Metro
$634
$636
0.3%
8.5%
9.6%
110 bps
SUPPLY TRENDS
•
•
Source: Reis, Inc
Apartment developers completed five apartment properties, totaling
1,158 units, in the first eight months of 2010. The largest property,
containing 402 units, was completed in the Hamilton County
submarket.
Recently completed properties experienced strong absorption. A 280unit property that opened in the Hamilton County submarket in
December was 62.9% occupied in June, equating to a 25 unit-permonth absorption rate. Additionally, the final c/o was issued for a 402unit Hamilton County property in June. According to Reis, the
property was already 58.0% occupied.
Seven projects (1,224 units) were under construction in August. Two
of the properties (246 units) are scheduled to open later this year, four
properties (728 units) are expected to debut in 2011 and the final
property (250 units) will open in 2012.
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
2,000
Completions
Absorption
1,500
1,000
Units
•
Change
500
0
-500
-1,000
-1,500
02 03 04 05 06 07 08 09 10f 11f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
800.837.5100
RED CAPITAL GROUP®
Market Overview
May 2010
EXECUTIVE SUMMARY
B
ased on metro payroll employment data, economic
conditions reached a nadir
in 3Q09 as employers shed -48,600
(-5.3%) jobs year-over-year. Since
then, the pace annual of job decline
moderated to -44,100 (-4.8%) in
4Q09 and further to only -27,200
(-3.1%) in 1Q10. Similarly, total employment, as measured by the BLS’s
household survey, fell -44,953
(-5.5%) y-o-y in 1Q10, comparing
favorably to the -57,591 (-6.7%) job
decline observed in the previous period.
The improvements were partially due
to a rebound among administrative
support service firms. The sector was
responsible for a monthly y-o-y average decline of -8,300 jobs in 2009,
but added 6,800 workers in the
twelve-month period ended in March.
Additionally, manufacturing firms
and retailers cut -17,200 jobs y-o-y in
4Q09 and only -8,700 jobs y-o-y in
1Q10.
Recovery also was evident in the seasonally-adjusted data. Payroll headcounts increased 2,900 from January
to March, following eight consecutive
quarterly declines. Moreover, results
from the Manpower Outlook Employment Survey suggest that job growth
will continue next quarter. As of
March, 15% of surveyed firms
planned to add workers in 2Q10,
higher than the 9% share that expected to shed jobs.
Nevertheless, RED CAPITAL Research (RCR) expect y-o-y job trends
to remain negative this year. Our
econometric model predicts that employers will eliminate -8,700 (-1.0%)
jobs, before adding 12,000 (1.4%)
positions to payrolls in 2011.
Metro home prices continued to rise
in the first quarter. The National Association of Realtors calculate a median single-family home price of
SNAP SHOT
$108,500 in 1Q10, up 13.9% from
$95,300 in 1Q09. On the other hand,
sales velocity decelerated slightly,
falling from 3,891 sales in 1Q09 to
3,829 closed transactions in 1Q10
Apartment demand rebounded in the
first quarter as property managers net
leased 86 units. By comparison,
negative net absorption totaled 1,433
units in the previous six-month period. As a result, the metro occupancy rate fell 160 basis points y-o-y
to 90.0%. Marcus & Millichap report
that supply was largely to blame for a
200 basis point decrease in Class-A
occupancy from 92.4% in 1Q09 to
90.4% in 1Q10. Additionally, weak
demand contributed to a 180 basis
point drop in Class B/C occupancy.
Property owners managed to stabilize
rent trends in recent months. Indeed,
the average effective rent rose 0.2%
sequentially, marking the second consecutive quarterly decline. Previously, effective rent fell for four consecutive quarters from 4Q08 to 3Q09.
With regard to asking rent, Marcus &
Millichap note that Class-A rent fell
-2.7% y-o-y to $754, comparing favorably to the sharp -5.1% annual
decrease observed among Class B/C
assets.
Reis expect effective rent growth to
strengthen going forward. The service predicts y-o-y growth of 0.5% at
year-end, followed by annual gains of
1.1% and 2.0% in 2011 and 2012,
respectively. Marcus & Millichap
predict that job market improvements
will pave the way for occupancy improvement among Class-A properties.
Based on an assumed 7.8% cap rate,
RCR calculate an 8.2% expected rate
of total return, ranking fifth highest
among the RED 50. The market exhibits a somewhat less favorable
measure of risk-adjusted return
(ranked 16th) owing to elevated historic occupancy trend volatility.
Y-o-y
change
Projected
YE 2010
160bps
30bps
0.6%
0.5%
27.2m
8.7m
Vacancy
(10.0% - 1Q10)
Effective
Rents
($632 - 1Q10)
Cap Rate
(N/A - 1Q10)
Employment
(845.4m - 1Q10)
KEY POINTS
•
Positive net absorption totaled 86 units from
January to March, resulting in a 10 basis
point decrease in vacancy from 10.1% in
4Q09 to 10.0% in 1Q10.
Conversely,
vacancy surged 160 basis points year-overyear as supply (809 units) outpaced demand
(-917 units).
•
Effective rent increased 0.2% sequentially to
$632 in 1Q10, marking the second
consecutive quarterly gain. As a result, the
pace of annual effective rent decline
moderated from -1.1% in 4Q09 to -0.6% in
the first quarter.
•
Home prices continued to rebound in the
first quarter. The National Association of
Realtors estimate that the median price of a
single-family home increased 13.9% yearover-year to $108,500 in the first quarter.
By comparison, the median home price
advanced 11.3% year-over-year in 4Q09.
•
Real Capital Analytics identify eight
investor-grade property trades in the twelvemonth period ended in March. According to
CBRE, cap rates for Class-A properties
ranged from 7.5% to 8.25% and cap rates for
Class-B properties ranged from 8.0% to
9.0% in March.
VACANCY TRENDS
•
•
•
The metro vacancy rate decreased 10 basis points sequentially from
10.1% in 4Q09 to 10.0% in 1Q10, owing to limited supply. Property
managers net leased only 86 units from January to March, but no units
were completed during the period.
On a year-over-year basis, vacancy surged 160 basis points as tenants
vacated 917 units and developers completed 809 units.
Two (Near Northwest and Johnson County) of the metro’s thirteen
submarkets experienced year-over-year vacancy improvements in the
first quarter.
Source: Reis, Inc.
12%
Metro Vacancy Rate
•
10.0%
10%
8.4%
8%
6%
4%
Indianapolis
U.S.A.
2%
0%
Reis expect vacancy to rise 30 basis points through year-end. On the
other hand, the vacancy rate is forecast to fall 10 basis points next year.
1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q
00 01 02 03 04 05 06 07 08 09 10
th
RANK: 37 out of 50
RENT TRENDS
•
•
•
The average effective rent increased 0.2% sequentially, on pace with
the increase observed in the previous period. As a result, effective rent
declined -0.6% year-over-year in 1Q10, slower than the -1.1% annual
drop observed in 4Q09.
Marcus & Millichap estimate that Class-A asking rent decreased -2.7%
year-over-year to $754. By comparison, the average asking rent among
Class B/C properties plummeted -5.1% year-over-year to $561.
At -3.4%, the East submarket experienced the sharpest year-over-year
decrease in effective rent in 1Q10.
Source: Reis, Inc.
YoY Rent Trend
•
Metro Rent Trends
Reis predict that effective rent will advance at a 0.5% annual pace by
year-end.
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
Asking
Effective
-0.6%
-0.7%
1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q
00 01 02 03 04 05 06 07 08 09 10
rd
RANK: 23 out of 50
•
•
Real Capital Analytics count eight transactions involving properties
priced at or above $2 million in the twelve-month period ended in
March. But the source reports sales data for only three of the trades,
totaling $16.7 million in sales proceeds. The average price per unit
was $26,220.
According to the March CBRE survey, stabilized Class-A assets traded
at cap rates ranging from 7.5% to 8.25%. By comparison, Class-B cap
rates ranged from 8.0% to 9.0%.
Based on an assumed 7.8% cap rate, RCR calculate an 8.2% expected
rate of total return. Moreover, below average historic rent trend
volatility gives rise to the 16th highest measure of risk-adjusted return
among the RED 50.
8.4%
8.2%
Cap Rate
•
Source: Reis, Inc.
8.6%
8.0%
7.8%
7.6%
7.4%
7.2%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
08
08 08
08
09 09
09 09
10
Property Name
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
$240
MSA
$220
•
US
Prices (000)
$200
•
$180
$160
$140
•
$120
$100
$80
07
08
09
Y
Y
Y
•
1Q 2Q 3Q 4Q 1Q
09
09
09
09
10
•
Annual Chg (000)
20
12
10
0
•
-8.7
-30
-40
-50
99 00 01 02 03 04 05 06 07 08 09 10f 11f
•
•
Source: BLS
6%
•
2%
Rate
HousingTracker.net report that the median asking price among MSA
single-family homes and condos fell -3.3% year-over-year to $145,000
in April.
The pace of annual payroll job attrition decelerated sharply in the first
quarter. Indeed, a net of -27,200 (-3.1%) jobs were lost year-overyear in 1Q10, far fewer than the -44,100 (-4.8%) jobs lost in the previous period.
Improvements in the business service sector were partially responsible. Administrative support service firms created 4,200 net new jobs
year-over-year in 1Q10, the first gain since 1Q08 (+900 jobs). Conversely, professional, scientific, and technical service providers
trimmed -3,100 workers from staffs year-over-year, worse than the
-2,600 job decrease observed in 4Q09.
Likewise, slower job losses were recorded among manufacturing and
retail establishments. Combined, the sectors eliminated -17,200 jobs
year-over-year in 4Q09 and only -8,700 jobs year-over-year in 1Q10.
According to the BLS’s household survey, the metro unemployment
rate was 9.5% in March, up from 8.9% in the same month last year.
Seasonally-Adjusted
Indianapolis
USA
4%
Sales activity, on the other hand, slowed in the first quarter. The
Indiana Association of Realtors identify that 3,829 homes sold in
1Q10, down -1.6% from 3,891 sales in the same period of 2009.
30
-20
Home prices improved recently.
According to the National
Association of Realtors, the median price of a single-family MSA
home increased 13.9% year-over-year from $95,300 in 1Q09 to
$108,500 in 1Q10.
EMPLOYMENT TRENDS
-10
The pace of metro population growth decelerated slightly from 1.4% in
2008 to 1.3% in 2009 even through positive net domestic migration
accelerated to 7,034 residents.
0%
On a seasonally-adjusted basis, metro employers added 2,900 positions to payrolls from January to March, comparing favorably to the
-9,400 quarterly average decrease observed in 2009.
Forecast
-2%
•
-4%
-6%
-8%
RCR expect Indianapolis employers to add 12,000 (1.4%) workers
next year, following a modest -8,700 (-1.0%) job decrease in 2010.
By contrast, Economy.com are optimistic, forecasting gains of 3,640
(0.4%) jobs this year and 15,270 (1.8%) jobs in 2011.
99 00 01 02 03 04 05 06 07 08 09 10
15%
10%
5%
Indianapolis
4.6%
3.6%
Colum bus
6.7%
8.2%
5.4%
9.5%
6.7%
7.9%
11.4%
9.5%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Submarket
Southwest
Southeast
West
Near Northwest
Far Northwest
East
Castleton
Far Northeast
Central
Boone / Hendricks
Hancock / Shelby
Hamilton County
Effective Rent
Physical Vacancy
1Q09
1Q10
Change
1Q09
1Q10
$598
$599
$564
$586
$640
$556
$711
$549
$790
$787
$604
$782
$601
$610
$555
$576
$625
$537
$708
$541
$786
$783
$593
$782
0.5%
1.8%
-1.6%
-1.7%
-2.3%
-3.4%
-0.4%
-1.5%
-0.5%
-0.5%
-1.8%
0.0%
8.1%
8.9%
10.5%
8.9%
7.0%
7.4%
7.9%
8.8%
3.5%
8.3%
9.3%
8.7%
9.2%
11.0%
13.3%
8.7%
7.0%
8.7%
8.4%
11.7%
4.8%
10.1%
10.2%
12.0%
$618
$617
-0.2%
8.5%
8.0%
-50 bps
Metro
$636
$632
-0.6%
8.4%
10.0%
160 bps
•
Source: Reis, Inc
Developers completed one apartment property, containing 220 units in
1Q10. The asset is located in the Far Northwest submarket.
Additionally, Reis were aware of one property (218 units) that was
delivered to the Central submarket in April.
As of May, Reis identified seven apartment properties under
construction, totaling 1,502 units. The largest addition to inventory
will occur in the Hamilton County submarket as five properties (1,258
units) were under construction. Another 23 properties, containing
5,452 units that were in the planned or proposed phase. The
developments are concentrated in the Hamilton County (2,370 units)
and Central (1,357 units) submarkets.
Condo construction was comparatively light as five properties totaling
569 units were under construction in May. Another 1,199 condo units
were in the planned or proposed phase.
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
2,000
Completions
Absorption
1,500
1,000
500
Units
•
110 bps
210 bps
280 bps
-20 bps
unchg
130 bps
50 bps
290 bps
130 bps
180 bps
90 bps
330 bps
Johnson County
SUPPLY TRENDS
•
Change
0
-500
-1,000
-1,500
-2,000
02 03 04 05 06 07 08 09 10f 11f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
800.837.5100
RED CAPITAL GROUP®
Market Overview
March 2010
EXECUTIVE SUMMARY
P
ayroll employment trends
remained weak in the fourth
quarter. On a year-over-year
basis, area employers eliminated
-38,000 (-4.1%) jobs in 3Q09 and
-35,200 (-3.9%) jobs in 4Q09. On the
other hand, conditions in the business
service super-sector improved in
4Q09. Professional, scientific and
technical service firms reduced headcounts by -2,400 y-o-y, following a
-2,800-job annual decline in 3Q09.
Likewise, administrative support service providers eliminated -10,100
jobs y-o-y in 3Q09 and -4,400 jobs yo-y in 4Q09.
Seasonally-adjusted payroll trends
improved dramatically in 3Q09, but
deteriorated in the fourth quarter.
Indeed, headcounts declined at a
-12,100-job quarterly pace from 4Q08
to 2Q09, and only -1,800 jobs were
eliminated in 3Q09. Unfortunately,
the pace of job losses accelerated to
-7,400 from October to December.
Business sentiment improved in the
second quarter. According to the
March Manpower Employment Outlook Survey, 15% of area firms
planned to add workers in 2Q10,
slightly higher than the 9% share that
expected to reduce staffs. By comparison, 12% of the respondents to the
December survey (regarding 1Q10
hiring plans) anticipated increased
staff levels and 7% expected to contract.
Our econometric model predicts that
the pace of payroll job attrition will
slow next year as -4,300 positions are
eliminated from payrolls. Moreover,
RED CAPITAL Research (RCR)
predict that a recovery will begin in
2011 as a net of 14,600 (1.7%) jobs
are created. By comparison, PNC
Financial Services expect a similar
loss of -6,000 (-0.7%) jobs in 2010
and a 15,000-job gain next year.
Home prices and sales activity im-
SNAP SHOT
proved in the fourth quarter. The
National Association of Realtors estimate that the metro median singlefamily home price advanced 11.3% yo-y to $111,500. By comparison, the
median price rose at a 2.0% annual
rate in 3Q09. With regard to sales
velocity, the Indiana Association of
Realtors report that 5,186 metro
homes sold in 4Q09, up 16.1% from
the comparable period of 2008.
At 89.9%, the metro apartment occupancy rate dipped below 90% for the
first time since 2Q05. Weak demand
was partially to blame. Tenants vacated 776 units in 4Q09 and 1,469
units in 2009. By comparison, developers completed 1,359 units over the
year, but none in the fourth quarter.
Y-o-y
change
Projected
2010
230bps
20bps
1.1%
0.5%
35.2m
4.3m
Vacancy
(10.1% - 4Q09)
Effective
Rents
($631 - 4Q09)
Cap Rate
(8.2% - 4Q09)
Employment
(879.5m - 4Q09)
KEY POINTS
The average effective rent increased
$1 (0.2%) sequentially, but was down
-1.1% y-o-y to $631 in 4Q09. Asking
rent also advanced $1 sequentially,
but fell at a slower -0.9% annual rate.
Property owners kept concessions
low, averaging only 5.8% of asking
rent in 4Q09, the equivalent of 0.7
months free-rent on a twelve-month
lease.
•
The metro vacancy rate spiked in the fourth
quarter, owing to weak demand. Negative
net absorption totaled -776 units during
4Q09, contributing to an 80 basis point
sequential increase in vacancy from 9.3% in
3Q09 to 10.1% in 4Q09. Additionally,
vacancy was up 230 basis points year-overyear as supply (1,359 units) outpaced
demand (-1,469 units).
Reis predict that apartment market
conditions will deteriorate this year.
The service forecasts a 20 basis point
decrease in occupancy and a -0.5%
drop in effective rent by year-end.
The service has a less pessimistic
view of 2011; predicting a 10 basis
point decrease in occupancy, but a
0.5% increase in effective rent.
•
Effective rent rebounded slightly in 4Q09.
The figure increased 0.2% sequentially to
$631 in the fourth quarter. Consequently,
the average effective rent declined at a more
modest -1.1% annual rate, better than the
-1.6% drop in the previous quarter.
•
According to the National Association of
MSA home increased 11.3% year-over-year
to $111,500 in 4Q09.
The Indiana
Association of Realtors estimate that metro
sales velocity rose 16.1% year-over-year as
5,186 homes sold in the fourth quarter.
•
Real Capital Analytics identify 17 trades
involving properties priced at or above $5
million in 2009. Sales volume totaled $294
million and the average price per unit was
$58,727.
Real Capital Analytics calculate sales
volume of $294 million in 2009,
down from $245 million in 2008. The
average price per unit was $58,727
and the average cap rate was 8.5% in
2009. Based on an assumed 8.8% cap
rate, RCR calculate a robust 7.8%
expected rate of total return. As a
result, the metro boasts the 15th highest measure of risk-adjusted return in
the RED 50.
Indianapolis - Carmel, Indiana MSA - 4Q 2009
VACANCY TRENDS
•
•
•
The metro vacancy rate increase increased 80 basis points sequentially
and 230 basis points year-over-year to 10.1% in 4Q09, due to weak
tenant demand. Negative net absorption totaled 776 units in 4Q09 and
1,469 units in 2009.
Supply was relatively tame. No units were completed during the fourth
quarter and developers completed only 1,359 units in 2009,
representing a 1.3% increase in inventory.
Vacancy in the East submarket decreased 250 basis points year-overyear to 6.1% in 4Q09. The balance of the metro’s 13 submarkets
experienced rising vacancy over the period.
Source: Reis, Inc.
12%
Metro Vacancy Rate
•
10.1%
10%
7.8%
8%
6%
4%
Indianapolis
U.S.A.
2%
0%
4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q
Reis predict that vacancy will increase to 10.3% this year and rise to
10.4% in 2011.
99 00 01 02 03 04 05 06 07 08 09
Metro Rent Trends
RENT TRENDS
•
•
•
Source: Reis, Inc.
Effective rent rebounded in the fourth quarter as the figure rose $1 or
0.2% sequentially. Consequently, year-over-year rent trends improved
from -1.6% in 3Q09 to -1.1% in 4Q09.
Property managers held concessions relatively firm in 4Q09. The size
of the average concession package was 5.8% of asking rent in the
fourth quarter, unchanged from the previous period and only slightly
higher than the 5.6% level observed in 4Q08.
Eleven of the metro’s 13 submarket experienced falling effective rent
year-over-year in 4Q09. At -4.2%, the Far Northwest submarket
posted the sharpest drop.
YoY Rent Trend
•
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
Asking
Effective
-0.9%
-1.1%
4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q
Reis expect effective rent to fall to -0.5% to $628 by year-end.
99 00 01 02 03 04 05 06 07 08 09
th
RANK: 18 out of 50
•
•
According to Real Capital Analytics, metro sales activity surged in
2009. The source identified 17 transactions totaling $294 million in
sales proceeds. By comparison, sales volume totaled $245 million in
the previous year. Moreover, the average price per unit rose 12.1%
from $52,373 in 2008 to $58,727 in 2009.
One of the fourth quarter transactions involved a mix of apartment and
condo units. The 104 apartment units were originally constructed in
1974 and were 71% occupied at the time of the sale. The property also
includes 45 partially completed condo units. In addition to finishing
the condo units, the new owner plans to rehab the apartment project.
8.0%
Cap Rate
•
Source: Reis, Inc.
8.5%
At an assumed 8.5% generic metro cap rate, RCR calculate a 7.8%
expected rate of total return, higher than the 6.7% RED 50 average.
7.5%
7.0%
6.5%
4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
07 08 08 08 08 09 09 09 08
Property Name
Harbour Town (Apts and Condos)
Lake Castleton
Deercross
Quail Run
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated
Cap Rate
A (Condos), B/C (Apts)
A
A
A
November 2009
December 2009
December 2009
October 2009
$5.0
$39.0
$13.7
$8.8
$30,303
$30,830
$36,828
$53,354
N/A
8.6%
8.4%
9.2%
$240
MSA
$220
•
US
Prices (000)
$200
•
$180
$160
$140
$120
$100
$80
07
08
09
Y
Y
Y
•
4Q 1Q 2Q 3Q 4Q
08
09
09
09
09
•
14.6
Annual Chg (000)
20
10
0
•
-4.3
-20
-30
-40
99 00 01 02 03 04 05 06 07 08 09 10f 11f
•
Indianapolis
USA
Better business service trends were largely responsible for slower
headline payroll losses. For instance, the administrative support service subsector eliminated -10,100 jobs year-over-year in 3Q09 and
only -4,400 jobs year-over-year in 4Q09. With regard to professional
service establishments, employment contracted -2,400 year-over-year
in 4Q09.
Additionally, the construction, manufacturing and financial service
sectors lost a combined -11,400 jobs year-over-year in 4Q09 as compared to -16,300 jobs lost year-over-year in 3Q09.
A net of -7,400 jobs were lost during the fourth quarter, following a
minimal -1,800-job decrease in the previous quarter.
Forecast
2%
Rate
•
The pace of year-over-year job attrition decelerated slightly from
-38,000 (-4.1%) in 3Q09 to -35,200 (-3.9%) in 4Q09. Conversely,
data from the BLS household survey reveal that a total of -54,248
jobs were lost year-over-year in 4Q09, nearly equal to the -54,497-job
decline observed in 3Q09.
Seasonally-Adjusted
Source: BLS
4%
RealtyTrac.com count 18,408 Indianapolis MSA foreclosures in 2009,
down -9.4% from 2008. Still, the metro foreclosure rate (2.47%) was
above the US average (2.21%) and ranked 55th highest among the 203
markets tracked by the source.
30
6%
The metro housing market improved in the fourth quarter. The
National Association of Realtors estimate that the median price of a
single-family MSA home rose 11.3% year-over-year to $111,500 in
4Q09. Likewise, the Indiana Association of Realtors report that metro
sales velocity advanced 16.1% from 4,468 in 4Q08 to 5,186. The
source also report that home prices trended higher in five of the ten
metro counties.
EMPLOYMENT TRENDS
-10
Tactician Corp. predict that the metro population will expand at a 1.4%
average annual rate from 2009 to 2014, slightly slower than the 1.5%
growth rate observed from 2000 to 2009.
•
0%
-2%
-4%
•
-6%
RCR predict that employment will continue to decline this year, but
rebound next year. Our econometric model produce point estimates
of -4,300 (-0.5%) payroll jobs lost this year followed by a 14,600
(1.7%) job gain in 2011.
Similarly, PNC Financial Services forecast a -6,000 (-0.7%) job loss
this year, followed by a gain of 15,000 (1.7%) new jobs in 2011.
99 00 01 02 03 04 05 06 07 08 09 10
15%
10%
5%
Indianapolis
Colum bus
6.2%
4.2%
7.7%
5.0%
3.1%
9.2%
6.3%
7.6%
11.2%
9.3%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Submarket
Effective Rent
Physical Vacancy
4Q08
4Q09
Change
4Q08
4Q09
Southwest
Southeast
West
Near Northwest
Far Northwest
East
Castleton
Far Northeast
Central
Boone / Hendricks
Hancock / Shelby
Hamilton County
$602
$608
$565
$588
$650
$553
$711
$545
$797
$781
$613
$788
$597
$607
$548
$574
$623
$545
$713
$541
$796
$781
$591
$776
-0.8%
-0.2%
-3.0%
-2.4%
-4.2%
-1.4%
0.3%
-0.7%
-0.1%
0.0%
-3.6%
-1.5%
6.7%
8.9%
9.1%
8.3%
6.2%
8.6%
8.4%
8.8%
3.6%
5.0%
6.6%
7.5%
9.7%
11.5%
13.0%
9.0%
7.6%
6.1%
9.1%
11.1%
5.2%
8.8%
10.1%
12.5%
300 bps
260 bps
390 bps
70 bps
140 bps
-250 bps
70 bps
230 bps
160 bps
380 bps
350 bps
500 bps
Johnson County
$626
$620
-1.0%
7.9%
8.1%
20 bps
Metro
$638
$631
-1.1%
7.8%
10.1%
SUPPLY TRENDS
•
•
Source: Reis, Inc
Apartment developers completed seven properties totaling 1,359 units
during 2009. Three of the properties (723 units) were delivered to the
Hamilton County submarket. The balance are located in the Johnson
County (272 units), Boone / Hendricks (250 units), Castleton (66 units)
and Southeast (48 units) submarkets.
Moreover, nine apartments were under construction in March. Of the
1,940 units under construction, 1,258 units are in the Hamilton County
submarket. Also, four of the nine properties under construction are
schedule to open later this year.
Reis were aware of five condo properties under construction in March.
The largest asset (304 units) is under construction in the Castleton
submarket. Two properties (121 units) are located in the Central
submarket and two assets are located in the Hamilton County (144
units) submarket.
Daniel J. Hogan
[email protected]
614-857-1416
230 bps
William T. Hinga
[email protected]
614-857-1499
2,000
Completions
Absorption
1,500
1,000
500
Units
•
Change
0
-500
-1,000
-1,500
-2,000
02 03 04 05 06 07 08 09 10f 11f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
800.837.5100
RED CAPITAL GROUP®
Market Overview
November 2009
EXECUTIVE SUMMARY
G
ross domestic product advanced 3.5% in 3Q09, signaling the end of the Great
Recession, and Moody’s Economy.com recently opined that Indiana
was one of 11 states (and Indianapolis
one of 79 MSAs) to emerge from the
recession in September. The source
attributes the state’s performance to
stable housing markets, growth in the
medical research industry and the
Cash-for-Clunkers program. But the
jury is still out on this question. The
Leading Index for Indiana was flat in
September, leading the director who
oversees the index to comment that
the state economy is not out of the
woods yet.
Metro payroll employment figures
don’t provide much clarity. The pace
of year-over-year job loss edged
higher as employers cut -35,400 (3.8%) positions from payrolls in
2Q09 and -37,200 (-4.0%) jobs in
3Q09. On the other hand, seasonallyadjusted payroll data show that headcounts advanced 700 from July to
September, after a total of
-36,300
jobs were eliminated in the preceding
nine months.
The RED CAPITAL Research
(RCR) econometric payroll model
suggests that payroll job losses will
moderate to -26,500 (-2.8%) in the
fourth quarter. Even better, the model
predicts a modest gain of 1,700
(0.2%) jobs next year and a strong
17,300 (2.0%) job advance in 2011.
Economists at Indiana University are
more optimistic about growth next
year, forecasting a 50,000 (1.8%) job
gain in the state.
The metro housing market continued
to rebound in the third quarter. According to the National Association of
Realtors, the metro median singlefamily home price rose 2.0% y-o-y
from $117,900 in 3Q08 to $120,200
in 3Q09. Sales velocity slowed -9.7%
SNAP SHOT
y-o-y from 6,404 in the first nine
months of 2008 to 5,780 in the same
period this year.
By contrast, third quarter apartment
demand was exceptionally weak.
Tenants vacated 733 units in the
three-month span, the largest exodus
since 1Q03. As a result, the metro
occupancy rate plunged 90 basis
points from 91.7% in 2Q09 to 90.8%
in 3Q09. On an annual basis, occupancy tumbled 180 basis points partially due to increased supply. Developers completed 837 units in the
twelve-month period ended in September.
Facing weak tenant demand, owners
chose to cut effective rent over the
past year. In each of the preceding
three quarters the average effective
rent fell -0.3% sequentially. But in
3Q09, owners lowered effective rent
by -0.8% from $633 in 2Q09 to $628
in 3Q09. Asking rent declined at a
sharper -0.9% sequential pace.
Reis predict that market conditions
will continue to deteriorate through
2010. The service forecasts that effective rent will fall $9 to $619 by
year-end 2010. Moreover, Reis expect supply (413 units) to outpace
demand (-200 units) from October
2009 to December 2010, causing average occupancy to fall to 90.3%.
According to Real Capital Analytics,
11 trades involving properties priced
at or above $5 million were completed in the first ten months of 2009.
But the source report pricing data on
only three of the transactions. Sales
volume totaled $40.6 and the average
price was $33,842 per unit. Marcus
& Millichap calculate a median price
per unit of $36,400 in the twelvemonth period ended in September, a
decrease of -24% from the year earlier
period. The source also reports that
capitalization rates ranged from
8.75% to 9.25%.
Y-o-y
change
Projected
2009
Vacancy
(9.2% - 3Q09)
Effective
Rents
180bps
1.7%
2.4%
37.2m
31m
($628 - 3Q09)
Cap Rate
(N/A - 3Q09)
Employment
(881.5m - 3Q09)
KEY POINTS
•
Negative net absorption of 733 units was
responsible for a 90 basis point increase in
vacancy from 8.3% in 2Q09 to 9.2% in
3Q09. Moreover, vacancy rose 180 basis
points as supply (837 units) outpaced
demand (-1,389 units) in the twelve-month
period ended in September.
•
Effective rent fell -0.8% sequentially and
-1.7% year-over-year to $628 in 3Q09. The
latter was the largest decline since 3Q02.
Asking rent fell -1.0% year-over-year to
$667.
•
Home prices continued to climb in the third
quarter. Following a 2.4% year-over-year
advance in 2Q09, the median single-family
home price rose 2.0% year-over-year to
$120,200 in 3Q09.
•
Real Capital Analytics count 11 transaction
involving properties priced at or above $5
million in the first ten months of 2009. By
comparison, 13 trades were recorded in the
same period last year.
•
At an assumed 8.0% going-in yield, RCR
calculate a 6.0% expected rate of total return,
ranking 16th among the RED 50.
VACANCY TRENDS
•
•
Weak apartment demand and increased supply resulted in a sharp rise
in vacancy. The metro vacancy rate rose 90 basis points sequentially
to 9.2% in 3Q09, owing to negative net absorption of 733 units and
completion of 249 units.
Similarly, tenants vacated 1,389 units and developers added 837 units
in the twelve-month period ended in September. Consequently, the
vacancy rate spiked 180 basis points year-over-year.
Three (Southeast, West and Hamilton County) of the metro’s 12
submarkets recorded double-digit vacancy rates in the third quarter.
Conversely, tight conditions (2.8% vacancy) were observed in the
Central submarket.
Source: Reis, Inc.
12%
Metro Vacancy Rate
•
9.2%
10%
7.4%
8%
6%
4%
Indianapolis
U.S.A.
2%
0%
3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q
COMMENT: Reis expect metro vacancy to rise to 9.7% by YE 2010.
00
01
RENT TRENDS
•
•
•
03
04 05
06
07
08
09
Metro Rent Trends
Measured on a sequential quarter basis, the average effective rent
decreased for the fourth consecutive period in 3Q09. The most recent
drop (-0.8%) was the sharpest yet, as each of the previous declines
totaled only -0.3%. As a result, year-over-year effective rent trends
deteriorated from -0.5% in 2Q09 to -1.7% in 3Q09.
According to Marcus & Millichap, Class-A asking rent fell -0.5% yearover-year to $772 in 3Q09. By comparison, Class B/C asking rent
dropped -0.7% to $592.
Central submarket properties capitalized on tight vacancy raising
effective rent 6.3% from $743 in 3Q08 to $790 in 3Q09.
Source: Reis, Inc.
YoY Rent Trend
•
02
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
Asking
Effective
-1.0%
-1.7%
3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q
Reis forecast that effective rent will fall from $628 in September to
$619 in December 2010.
00
01
02
03
04
05
06
07
08
09
•
•
Real Capital Analytics count 11 transactions involving properties
priced at or above $5 million in the first ten months of 2009. By
comparison, 13 properties traded in the same period last year. But
Real Capital Analytics report price information on only three of the
transactions closed this year. Sales volume totaled $40.6 million and
the average price per unit was $33,842.
Marcus & Millichap calculate a median price per unit of $36,400,
down -24% year-over-year. The source notes that cap rates ranged
from 8.75% to 9.25%.
At an assumed 8.0% going-in yield, RCR calculate a 6.0% expected
rate of total return, above the 5.4% RED 50 average. Below average
historic NOI growth volatility produces the 14th highest measure of
risk-adjusted return in the RED 50.
8.0%
Cap Rate
•
Source: Reis, Inc.
8.5%
7.5%
7.0%
6.5%
3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
07 07 08 08 08 08 09 09 09
Property Name
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
•
$240
$220
MSA
US
•
Prices (000)
$200
$180
$160
$140
•
$120
$100
$80
05
06
07
Y
Y
Y
3Q 4Q 1Q 2Q 3Q
08
08
09
09
09
17.3
Annual Chg (000)
20
1.7
•
•
0
-10
-20
-30
•
-31
99 00 01 02 03 04 05 06 07 08 09f 10f 11f
•
Source: BLS
Metro employers lost a net of -37,200 (-4.0%) jobs year-over-year in
3Q09, worse than the -35,400 (-3.8%) job decrease in the previous
quarter.
Slower hiring among education and health service firms was largely
to blame. The sectors added 5,700 workers year-over-year in 2Q09
and only 1,500 year-over-year in 3Q09. Additionally, retailers cut
-3,600 jobs year-over-year in 3Q09, following a -600-job reduction in
2Q09.
The pace of construction and manufacturing job attrition moderated in
the third quarter. The sectors lost a combined -17,000 jobs year-overyear in 2Q09 and -15,200 year-over-year in 3Q09.
Data from the BLS’s household survey suggest that -50,811 (-5.8%)
jobs were lost year-over-year in 3Q09. As a result, the metro unemployment rate rose to 7.7% in September, up from 5.1% in the same
period last year.
Seasonally-Adjusted
6%
•
Indianapolis
USA
4%
2%
Rate
Data from the Indiana Association of Realtors show that the median
price rose on a year-over-year basis in the six of the metro’s ten
counties. The largest gain occurred in Brown County as the median
price rose 14.4% from $161,750 in 3Q08 to $185,000 in 3Q09. With
regard to sales velocity, 5,780 metro homes were sold during the third
quarter, down -9.7% from the same period of 2008.
30
-40
The National Association of Realtors report that home prices rose for
the second consecutive quarter in 3Q09. The median price of a singlefamily MSA home rose 2.4% year-over-year in 2Q09 and 2.0% yearover-year to $120,200 in 3Q09. By comparison, the US median singlefamily home price declined -11.2% year-over-year.
EMPLOYMENT TRENDS
10
According to the Census Bureau, the metro homeownership rate
plunged from 78.4% in 3Q08 to 72.7% in 3Q09.
0%
Measured on a seasonally-adjusted basis, payroll trends improved in
the third quarter. Area establishments cut -16,000 workers in 4Q08,
-10,600 jobs in 1Q09 and -9,700 jobs in 2Q09. By contrast, payrolls
advanced 700 in 3Q09.
Forecast
-2%
•
-4%
-6%
99 00 01 02 03 04 05 06 07 08 09
RCR expect job growth to return next year as 1,700 (0.2%) jobs are
created in 2010 and another 17,300 positions are added to payrolls in
2011. But the combined gains will not account for the estimated
-31,000 (-3.4%) jobs lost this year.
10%
5%
Indianapolis
3.1%
2.7%
Colum bus
4.8%
4.5%
5.9%
5.7%
7.1%
6.8%
8.7%
8.4%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Submarket
Effective Rent
Physical Vacancy
3Q08
3Q09
Change
3Q08
3Q09
Southwest / Johnson County
Southeast
West
Near Northwest
Far Northwest
East
Castleton
Far Northeast
Central
Boone / Hendricks
Hancock / Shelby
Hamilton County
$577
$583
$543
$583
$638
$524
$694
$536
$743
$754
$611
$762
$598
$605
$552
$580
$622
$555
$702
$529
$790
$769
$582
$781
3.6%
3.8%
1.6%
-0.5%
-2.6%
5.8%
1.2%
-1.3%
6.3%
2.1%
-4.8%
2.5%
9.0%
12.0%
9.5%
8.8%
7.9%
11.7%
7.1%
9.3%
4.8%
7.2%
7.0%
7.1%
8.6%
10.5%
12.4%
9.5%
7.9%
6.3%
8.4%
8.7%
2.8%
4.9%
9.7%
11.0%
-40 bps
-150 bps
290 bps
70 bps
0 bps
-540 bps
130 bps
-60 bps
-200 bps
-230 bps
270 bps
390 bps
Metro
$639
$628
-1.7%
7.4%
9.2%
180 bps
SUPPLY TRENDS
•
•
•
Source: Reis, Inc
Developers completed five apartment properties totaling 837 units in
the first ten months of 2009. Three of the assets (723 units) are located
in the Hamilton County submarket. The other two developments are in
the Castleton (66 units) and Southeast (48 units) submarkets.
Seven apartment projects were under construction in November,
totaling 1,691 units. Developers were most active in Hamilton County
as five of the seven properties under construction (1,258 units) were
located in that submarket.
Another 4,410 apartment units were in the planned or proposed phase.
Six condo developments were under construction in November,
totaling 601 units. The largest property (304 units) is located in the
Castleton submarket.
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
2,000
Completions
Absorption
1,500
1,000
Units
•
Change
500
0
-500
-1,000
-1,500
02
03
04
05
06
07
08 09f 10f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
800.837.5100
RED CAPITAL GROUP®
Market Overview
August 2009
EXECUTIVE SUMMARY
I
ndianapolis payroll trends deteriorated in the second quarter, in line
with national averages. Total
payrolls declined at a 34,100 (-3.7%)
job pace in the period, down from a
24,400-job -2.7% setback posted in
1Q09. Significant quarter-on-quarter
deterioration was evident in a number
of industry super-sectors, with the
largest declines recorded in construction, wholesale trade, leisure and hospitality services and government.
May data were especially disappointing as year-over-year comparisons
deteriorated from a loss of 29,800
jobs during the 12 months ended in
April to record attrition of 39,400 (4.2%) jobs. Materially faster cuts
were recorded in wholesale and retail
trade, hospitality and business services, the last plummeting at a disconcerting –11.8% annual pace. Although
losses diminished to 33,000 (-3.6%)
jobs in June that metric still ranks as
the second largest 12-month loss ever
recorded in Indy’s BLS data series.
Poor results were attributable to
plunging tourist visits, weak auto production and declining ground freight
and warehousing activity. Hotel occupancy and average daily rates in
May declined -12.8% and -22.8% yo-y, respectively, according to Smith
Travel, due to lower auto race and
convention attendance. Vehicle manufacturing headcounts dropped -24.6%,
and formerly robust trucking and
warehousing establishments laid-off
6.4% of their employees.
RED CAPITAL Research are of the
mind that the Hoosier capital’s slump
will moderate in the second half of
the year, giving rise to average losses
of 28,700 jobs for 2009. Our econometric model projects year-on-year
losses continuing through 1Q10; however, five-digit job gains should
emerge in 2H10. Our model projects a
4,800-job advance for the full year.
SNAP SHOT
After posting the weakest first quarter
leasing trends in since 2005 (-363
units), Indianapolis owners encountered moderately stronger demand in
2Q, absorbing a net of 278 units. Developers completed 114 units in the
period, allowing average occupancy
to inch 10 basis points higher quarterto-quarter to 91.8%.
Nine of Indy’s 12 submarkets posted
sequential occupancy gains. The East
submarket achieved the largest occupancy advance, gaining 120 bps to
93.8% on net absorption of 54 units.
By contrast, tenants vacated 126 West
submarket units, sending the metro’s
highest submarket vacancy rate up
another 80 bps to 11.3%.
Rents continued to drop in the second
quarter but the rate of decline decelerated. After face and effective rents
fell -$2 and -$3, respectively, in
1Q09, average levels dropped only $1
each in 2Q to $672 and $633. Effective rents fell sequentially in eight
submarkets, with the East and Hancock County areas reporting declines
of more than -2%. Conversely, the
appeal of the Hamilton County submarket was reinforced as owners
chalked down an impressive
$13/1.7% effective rent advance.
Reis expect weak market conditions
to extend through 2010. The service
forecasts a further $14 (-2.2%) decline in effective rents by YE09, followed by a $3 (-0.5%) dip in 2010.
Average metro vacancy is projected
to rise another 50 bps to 8.7% by December before surging to a 9.7%
cyclical peak in 2010—2011.
Eleven metro properties exchanged
hands in 2H09 for total proceeds of
$149mm, according to Real Capital
Analytics, leading the Midwest region. RCA estimate the average cap
rate was 8.5%, also the highest among
Indianapolis’s Midwest peers. A bulk
trade by a public trust boosted sales.
Y-o-y
change
Projected
YE09
(8.2% - 2Q09)
70 bps
50 bps
Effective
Rents
0.5%
2.8%
1.0%
0.5%
34.1m
28.7m
Vacancy
($633 - 2Q09)
Cap Rate
(8.5%- 2Q09)
Employment
(887.6m - 2Q09)
KEY POINTS
•
Payroll trends deteriorated in the spring as
job losses accelerated to a 34,100-job, -3.7%
annual pace in 2Q09. Losses crested in May
at a 39,400-job rate before subsiding to a
small degree in June. Indeed, seasonallyadjusted figures indicate that Indianapolis
produced a net of 3,700 new jobs that month.
•
RCR expect year-over-year losses to
average about -26,000 jobs in 2H09 before
giving way to net gains by 2Q10.
•
Owners reported stronger market conditions
in 2Q09 following disappointing winter
results. Tenants net absorbed 278 units,
raising average occupancy 10 bps to 91.8%.
•
Average asking and effective rents declined
$1 each during the second quarter to $672
and $633, respectively. Reis forecast much
weaker condition to prevail in 2H09, with
the foregoing averages dropping $5 (-0.7%)
to $667 and $14 (-2.2%) to $619 by YE2009.
•
A publicly-traded trust disposed of seven
properties year-to-date as it sought to exit the
market. The company seeks to sell its seven
remaining Indianapolis properties.
•
Cap rates appear to be in the mid-8% area.
Indianapolis-Carmel, Indiana MSA - 2Q 2009
VACANCY TRENDS
•
•
After losing a net of 708 leased tenants over the prior six-month
period, Indianapolis apartment owners enjoyed stronger second
quarter demand when tenants absorbed a net of 278 units. After
accounting for completion of 114 new units, average occupancy gained
10 basis points quarter-to-quarter to 91.8%.
Second quarter demand for apartments in the Central Submarket was
impressive. Tenants absorbed 25 units (one of every five available
vacant units), slicing 70 bps from the submarket vacancy rate to a
metro-low 2.8%. Effective rents advanced 1.5% in the same period.
Source: Reis, Inc.
12%
Metro Vacancy Rate
•
7.5% 8.2%
10%
8%
6%
4%
INDY
0%
Developers are poised to add at least 943 units to inventory in the
second half. Reis expect net absorption in the period to be flat, forcing
average vacancy 50 bps higher by year-end to 8.7%
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q
00 01 01 02 03 04 04 05 06 07 07 08 09
RENT TRENDS
•
•
Metro Rent Trends
Face rents fell $1 (-0.1%) sequentially to a $677 average in 2Q09.
Estimated concessions levels were unchanged. Therefore, effective
rents also dropped $1 (-0.2%) to an average of $633. This compares to
a $636 level in 2Q08, producing a –0.5% year-on-year decline, ranking
16th among the RED 50, tied with Mideast rival Columbus, Ohio.
Sequential rent trends varied widely among submarkets. Eight
submarkets incurred sequential effective rent declines, including losses
of –1.7% or more in four. By contrast, owners in Central, Southeast
and Southwest submarkets enjoyed better than 1% rent gains.
Despite delivery of about 950 new units, Reis expect effective rents to
plummet in 2H09. Reis models project a $619 year-end 2009 average
effective rent metric, representing a –2.2% decline over six months.
Source: Reis, Inc.
YoY Rent Trend
•
•
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
ASKING
EFFECTIVE
-0.1%
-0.5%
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q
00 01 01 02 03 04 04 05 06 07 07 08 09
•
•
Dispositions by a publicly-traded real estate trust dominated the
property markets during the first seven months of 2009. The company
sold seven assets (prices undisclosed) encompassing nearly 2,500 units
in separate sales consummated in February and July. Total proceeds
approached $100 million. At this writing, the seller is marketing seven
additional properties, including a 1,261-unit project near Castleton.
A 20-year old class-B property located in Castleton was acquired by a
local investor/developer. The project was priced to the equivalent of
$39,648 per unit to an estimated 10.0% initial yield.
Real Capital Analytics reported in July that 10 Indianapolis properties
valued at $83.2mm were “distressed.” Scaled to the size of the market,
Indy ranked 26th most distressed among the 56 markets covered by the
service.
Source: Reis, Inc.
9.0%
8.5%
Cap Rate
•
U.S.A.
2%
8.0%
7.5%
7.0%
6.5%
6.0%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
07 07 07 07 08 08 08 08 09 09
Property Name
Hickory Place (Castleton)
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
B
1-Apr-09
$20.3
$39,648
10.0%
$240
INDY
$220
•
US
Prices (000)
$200
$180
•
$160
$140
•
$120
$100
$80
05
06
07
Y
Y
Y
1Q 2Q 3Q 4Q 1Q 2Q
08
08
08
08
09
Second Quarter 2009
•
30
Annual Chg (000)
20
4.8
10
0
•
-10
-20
99 00 01 02 03 04 05 06 07 08 09f 10f
Source: BLS
INDY
•
USA
Rate
2%
0%
•
-2%
-4%
-6%
99 00 01 02 03 04 05 06 07 08 09
6%
Both year-over-year and seasonally-adjusted payroll trends improved
in June, boding well for the future. Job losses on a year-over-year
basis declined to 33,000 in June from 39,400 in May. Seasonallyadjusted job totals increased sequentially from 879,700 in May to
883,300 in June. Meaningful month-to-month improvement was
observed in the critical financial and business services categories.
The unemployment returned to its cyclical high of 8.7% in June, up
10 bps from May, despite a 11,882 job advance in total employment,
based on data collected in the BLS Household Survey. Recent graduates contributed to a 14,319 worker increase in the labor force.
Forecast
•
RED CAPITAL Research expect y-o-y job losses to persist into the
first quarter 2010. Our econometric model projects 28,700 job loss in
2009, followed by a net gain of 4,800 jobs next year.
Indianapolis
4%
2%
The pace of job losses in ten of twelve industry super-sectors was
faster in the second quarter than the first. Job cuts decelerated only in
the financial service and manufacturing sectors, which combined for
aggregate attrition of 9,900 jobs from the comparable period of 2008 ,
down from 10,200 job cuts recorded in 1Q.
Second quarter trends in the construction, wholesale trade and hospitality services industries were off sharply from 1Q. On an aggregate
basis, job losses accelerated from a 6,300-job, -3.4% rate in 1Q to a
13,200-job, -6.8% pace in 2Q. Plunging tourism/convention business
and declining freight and warehousing activity were largely responsible.
Twelve Months ended June 2009
4%
8%
Labor market conditions deteriorated in the second quarter. After
posting job losses at a 24,400-job, -2.7% annual rate in the first quarter, attrition accelerated to 34,100-job, -3.7% pace in 2Q.
•
-28.7
6%
RealtyTrac.com report that 11,037 metro homes (1.48%) were involved
in a foreclosure action during the first half of 2009, ranking
Indianapolis 46th highest among the 203 largest U.S. metros. Among
Midwest metropolitan areas, only Detroit (#38), Chicago (#39) and
Flint, Michigan (#44) posted higher rates of foreclosure.
EMPLOYMENT TRENDS
-40
A total of 6,735 Indianapolis homes sold April through June, a –10.3%
decrease from 2008, according to the metropolitan board of realtors.
09
-30
The National Association of Realtors calculate a $121,300 2Q09
median metro home sales price, reflecting a 2.4% advance from the
comparable period of 2008 and a 28.2% sequential quarter increase.
The median price of Midwest Region homes fell –8.6% y-o-y to
$146,800 in the second quarter; prices rose 10.9% sequentially.
1.0%
0.7%
Colum bus
2.8%
2.4%
3.6%
4.0%
5.2%
4.7%
6.8%
6.3%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Submarket
Southwest / Johnson
Southeast
West
Near Northwest
Far Northwest
East
Castleton
Far Northeast
Central
Boone / Hendricks
Hancock / Shelby
Hamilton County
Metro
Effective Rent
Physical Vacancy
2Q08
2Q09
Change
2Q08
2Q09
Change
$599
$602
$565
$585
$647
$544
$712
$553
$784
$778
$626
$795
$604
$607
$562
$579
$635
$541
$699
$539
$802
$770
$592
$795
0.8%
0.8%
-0.5%
-1.0%
-1.9%
-0.6%
-1.8%
-2.5%
2.3%
-1.0%
-5.4%
0.0%
7.6%
9.9%
8.8%
7.4%
6.9%
9.0%
6.5%
7.1%
4.8%
7.2%
4.9%
6.8%
7.6%
8.7%
11.3%
8.3%
6.7%
6.2%
7.5%
9.0%
2.8%
5.1%
10.2%
8.5%
Unchd
-120 bps
250 bps
90 bps
-20 bps
-280 bps
100 bps
190 bps
-200 bps
-210 bps
530 bps
170 bps
$636
$633
-0.5%
7.4%
8.0%
60 bps
SUPPLY TRENDS
•
•
•
•
Reis identify four large projects incorporating 1,021 units under
construction in August. Two of the complexes, accounting for 469
units, are scheduled to be delivered by October 2009.
The resilience of the strong Hamilton County market will be tested by
heavy pending supply. Three projects totaling 801 units are under
construction in the submarket. Four other projects are in the planning
phase of which three (706 units) have anticipated debut dates in 2011.
The full weight of in process and planned supply will have the effect of
increasing the Hamilton County submarket apartment stock by 16%
from its current level.
The exceptionally tight Central Indianapolis submarket also will have a
large number of units to digest during the next several years. A
proposal is in the works for an adaptive re-use of the Bank One Tower,
the tallest building in Indiana, that would include 600 rental apartment
units. Reis aver that an October 2010 start date is planned. A 16-story
Tower with 200 units targeted at IUPUI student also is planned.
Single-family permit issue declined on a
for the 37th consecutive month in June.
was the lowest total for that month ever
history of the Census Bureau data series.
recorded in 1997.
trailing-12 month total basis
The June figure (401 units)
recorded in the sixteen year
The previous low (937) was
Source: Reis, Inc
3,500
Completions
Absorption
3,000
2,500
2,000
1,500
Units
•
1,000
500
0
-500
-1,000
-1,500
02
03
04
05
06
07
08 09f 10f
A three-story project near Conseco Field that received final C.O. in
August 2008 was 93.3% occupied in June at rents averaging $1,189.
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
800.837.5100
©2008 RED CAPITAL GROUP (11/08)
CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the
report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should
any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is
solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.
RED CAPITAL GROUP®
Market Overview
June 2009
EXECUTIVE SUMMARY
T
he Indianapolis economy experienced a period of transition in 2008. The year began
with steady job growth as 6,700
(0.7%) positions were added to metro
payrolls year-over-year in 1Q08. The
pace of expansion decelerated to
1,200 (0.1%) in 2Q08 and 500 (0.1%)
in 3Q08. Conditions deteriorated
thereafter as fourth quarter payroll
headcounts fell -16,200 (-1.8%) y-oy. Likewise, on a seasonally-adjusted
basis, -21,800 jobs were eliminated in
the last four months of 2008, outpacing the 500-job add recorded from
January to August.
Data from early 2009 were equally
dismal. Y-o-y job attrition surged to
-30,800 (-3.4%) in April, largely due
to the business service sector. Establishments cut -17,500 workers in the
twelve-month period ended in April,
as compared to a -1,400-job monthly
average y-o-y decrease in 2008.
The downturn was also partially attributable to weakness among manufacturing, wholesale trade, and transportation / warehousing firms. Combined the sectors lost 7,000 jobs y-o-y
in 4Q08 and -12,000 jobs y-o-y in
1Q08.
The RED CAPITAL Research
(RCR) econometric model produces a
point estimate of -29,400 (-3.2%) jobs
lost this year. We forecast a -3,100
(-0.3%) decrease next year. Economy.com predict that metro headcounts will fall -24,690 (-2.7%) in
2009 but advance 28,630 (3.2%) next
year.
Home prices fell, partially due to limited sales activity among high-end
residences. According to the Metro
Indianapolis Board of Realtors, the
median home price fell -13.4% y-o-y
to $97,000 in 1Q09. Sales velocity
decreased -22.5% as 4,386 homes
sold in the first quarter. The sharpest
decrease in sales activity was ob-
SNAP SHOT
served among higher-priced homes.
Indeed, 143 homes priced at or above
$500,000 traded in 1Q08, versus only
78 comparable transactions in 1Q09.
Conversely, sales velocity among
properties priced below $75,000 declined only -1.5% to 1,688.
Apartment move-outs outpaced new
leases for the second consecutive
quarter in 1Q09. As a result, the
metro occupancy rate fell 80 basis
points to 91.8% in the six-month period ended in March. On an annual
basis, strong tenant demand in 2Q and
3Q limited occupancy declines to
only 10 bps. But the rental market
was not homogenous. Impeded by
weak job trends, Class-A rental occupancy fell 70 bps y-o-y to 92.1%. On
the other hand, affordable rents
among Class B/C properties attracted
tenants, generating a 40 basis point
increase in occupancy from 91.2% in
1Q08 to 91.6% in 1Q09.
Reduced rental demand gave rise to
weaker rent trends. The positive,
albeit sluggish, fourth quarter sequential asking rent advance (0.3%), was
reversed in the first quarter as average
asking rent fell -0.3% to $673. Similarly, the pace of effective rent decline accelerated from -0.2% in 4Q08
to -0.5% in 1Q09.
Real Capital Analytics identified 20
investor-grade property trades, totaling $281 million in sales proceeds in
the twelve-month period ended in
April. The average price was $47,170
per unit and the average cap rate was
7.8%.
According to Marcus &
Millichap, cap rates rose about 70 bps
y-o-y to the mid-8% range in 1Q09.
Additionally, CB Richard Ellis conclude a cap rate range of 7.0% to
7.5% for stabilized Class-A assets.
Based on an assumed going-in yield
of 7.5%, RCR calculate a 4.0% expected rate of total return, comparable
to other Mideast metros.
Y-o-y
change
Projected
2009
(8.2% - 1Q09)
10bps
90bps
Effective
Rents
0.8%
2.0%
24.4m
29.4m
Vacancy
($934 - 1Q09)
Cap Rate
(N/A - 1Q09)
Employment
(877.9m - 1Q09)
KEY POINTS
•
The average vacancy rate increased 50 basis
points sequentially to 8.2% in 1Q09, due to
negative net absorption of 597 units. On a
year-over-year basis, the vacancy rate rose
only 10 basis points, owing to stout demand
from April to September 2008.
•
Asking and effective rents increased 0.7%
and 0.8% year-over-year, respectively in
1Q09. Measured on a sequential basis, both
rent metrics declined in the first quarter. The
average asking rent fell -0.3% and the
average effective rent decreased -0.5%.
•
As of May, there were six properties
containing 1,243 units under construction.
By comparison, only 844 units were
completed in the 24-month period ended in
December.
•
The National Association of Realtors
estimate that the median single-family home
price fell -11.8% year-over-year to $94,600
in 1Q09. Likewise, the median condo price
decreased -10.0% to $98,900.
•
According to RCA, sales volume totaled
$281 million in the year-ended in April. The
average cap rate was 7.8%.
VACANCY TRENDS
•
•
Apartment properties recorded negative net absorption for the second
consecutive quarter as tenants vacated 597 units in 1Q09. As a result,
the metro vacancy rate increased 50 basis points to 8.2%. On a yearover-year basis, supply (403 units) outpaced demand (204 units),
producing a 10 basis point increase in vacancy, year-over-year.
According to Marcus & Millichap, Class-A vacancy increased 70 basis
points year-over-year to 7.9% in March. Conversely, the vacancy rate
among Class B/C rentals fell 40 basis points to 8.4%.
Reis expect vacancy to rise 90 basis points to 9.1% by year-end, owing
to increased supply. In addition, the service predicts that vacancy will
advance 50 basis points to 9.6% in 2010.
Source: Reis, Inc.
12%
Metro Vacancy Rate
•
10%
8.1%
8%
6%
4%
Indianapolis
U.S.A.
2%
0%
1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
00 00 01 02 03 03 04 05 06 06 07 08 09
RENT TRENDS
•
•
Metro Rent Trends
Weak tenant demand gave rise to negative rent trends. Asking and
effective rent fell -0.3% and -0.5%, respectively in 1Q09. In addition,
the pace of annual effective rent growth decelerated to 0.8%, the
slowest rate recorded since 1Q06. Year-over-year asking rent growth
averaged 0.7%.
Rent trends were stronger in areas in and around downtown
Indianapolis. The East and Central submarkets recorded year-overyear effective rent gains of 4.0% and 3.5%, respectively. By contrast,
properties in the North and East outlying counties (Hancock, Shelby
and Hamilton) experienced falling effective rent year-over-year.
Reis forecast a -2.0% year-over-year decline in effective rent this year,
followed by a -0.5% decrease in 2010.
Source: Reis, Inc.
YoY Rent Trend
•
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
Asking
Effective
0.8%
0.7%
1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
00 00 01 02 03 03 04 05 06 06 07 08 09
RANK: 22nd out of 50
•
•
Source: Reis, Inc.
Real Capital Analytics report that sales volume totaled $281 million in
the year-ended in April. The average price per unit was $47,170 and
the average cap rate was 7.8%.
7.8%
According to CB Richard Ellis, a cap rate in the 7.0% to 7.5% range
was applicable to stabilized Class-A metro properties in March. The
range was about 50 basis points above the comparable figure in
November.
7.2%
RCR calculate a 4.0% expected rate of total return, assuming a 7.5%
going-in yield. Relatively stable historic NOI growth contributed to
the near-average (1.83) measure of risk-adjusted return.
7.6%
7.4%
Cap Rate
•
8.2%
7.0%
6.8%
6.6%
6.4%
6.2%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
07 07 07 07 08 08 08 08 09
Property Name
Hickory Place
Stone Key
Creekwood
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
B/C
B/C
April 2009
March 2009
February 2009
$24.9
$5.3
$15.0
$48,633
$31,235
$28,958
7.5%
8.5%
9.5%
$240
MSA
$220
•
US
•
Prices (000)
$200
$180
$160
$140
•
$120
$100
$80
05
06
07
Y
Y
Y
1Q 2Q 3Q 4Q 1Q
08
08
08
08
•
The Federal Housing Finance Agency (FHFA) calculate that
Indianapolis home values fell -0.4% year-over-year, utilizing a repeatsales methodology.
At 0.75%, the metro foreclosure rate ranked 53rd highest among the
203 markets tracked by RealtyTrac.com in 1Q09.
EMPLOYMENT TRENDS
Past 12 Months
•
30
20
Annual Chg (000)
According to the National Association of Realtors, the median price of
a single-family Indianapolis home was $94,600 in 1Q09, down -11.8%
year-over-year. The source report that the median priced condo sold
for $98,900 in the first quarter, a -10.0% drop from 1Q08.
09
10
0
The metro economy shed -30,800 (-3.4%) jobs in the twelve-month
period ended in April. On a seasonally-adjusted basis, employers cut
-15,900 positions from payrolls in the first four months of the year, as
compared to the -5,200-job reduction in the same period of 2008.
First Quarter 2009
-3.1
-10
-20
-30
•
•
-29.4
-40
99 00 01 02 03 04 05 06 07 08 09f 10f
•
Source: BLS
6%
•
Indianapolis
USA
4%
2%
Rate
The pace of metro population growth slowed from 1.5% in 2007 to
1.3% in 2008, due to reduced net domestic migration.
0%
Year-over-year payroll attrition surged in the first quarter. A net of
-16,200 (-1.8%) jobs were lost year-over-year in 4Q08 and a -24,400
(-2.7%) net job decrease was recorded in 1Q09.
The deterioration of metro payroll trends was partially attributable to
declines in business service headcounts. Super-sector payrolls fell
-7,500 year-over-year in 4Q08 and -14,100 year-over-year in 1Q09.
Sector losses were largely confined to providers of administrative
support services.
On the other hand, education and health service firms hired workers at
a faster pace in 1Q09. Sector establishment hired a monthly average
of 2,700 workers year-over-year in 2007 and 7,700 in 1Q09.
The metro unemployment rate nearly doubled from 4.7% in March
2008 to 8.7% in the same month this year. Total employment, measured by the BLS’s household survey, dropped at a -5.6% year-overyear pace in the twelve-month period ended in March.
Forecast
-2%
•
-4%
-6%
RED CAPITAL Research (RCR) forecast a -29,400 (-3.2%) decrease in metro employment this year and a -3,100-job decrease in
2010.
99 00 01 02 03 04 05 06 07 08 09
8%
6%
Indianapolis
4%
2%
1.1%
Colum bus
2.9%
5.1%
4.0%
6.4%
4.8%
3.7%
2.5%
6.7%
0.8%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Submarket
Effective Rent
Physical Vacancy
1Q08
1Q09
Change
1Q08
1Q09
Southwest / Johnson
Southeast
West
Near Northwest
Far Northwest
East
Castleton
Far Northeast
Central
Boone / Hendricks
Hancock / Shelby
Hamilton County
$586
$585
$555
$590
$650
$536
$708
$548
$760
$768
$614
$788
$598
$599
$566
$587
$640
$557
$711
$548
$787
$775
$605
$779
2.1%
2.5%
1.9%
-0.5%
-1.5%
4.0%
0.4%
0.0%
3.5%
1.0%
-1.3%
-1.1%
8.4%
10.5%
9.6%
8.1%
7.4%
9.9%
7.1%
7.5%
4.0%
8.8%
6.1%
6.2%
8.1%
8.9%
10.5%
8.7%
6.9%
7.4%
7.9%
8.8%
3.5%
5.3%
9.1%
8.1%
-30 bps
-160 bps
90 bps
60 bps
-50 bps
-250 bps
80 bps
130 bps
-50 bps
-350 bps
300 bps
190 bps
Metro
$629
$634
0.8%
8.1%
8.2%
10 bps
SUPPLY TRENDS
•
•
Source: Reis, Inc
A recent construction report showed that 638 apartment units were
completed in the first five months of 2009. Additionally, Reis were
aware of six properties totaling 1,243 units that were under
construction. Of those, the service expects 691 units to debut this year
and the remainder to open in 2010.
The Hamilton County submarket is among the fastest growing in the
metro area. More than 500 units were completed in the twelve-month
period ended in March and 975 units were under construction in May.
Reis also identified eight condo projects containing 592 units under
construction in May. The largest property (304 units) is located in the
Castleton submarket.
2,000
1,500
1,000
Units
•
500
0
-500
Completions
-1,000
William T. Hinga
[email protected]
614-857-1499
Absorption
-1,500
02
Daniel J. Hogan
[email protected]
614-857-1416
Change
03
04
05
06
07
08 09f 10f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
800.837.5100
sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by
RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the
report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should
any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is
solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.
RED CAPITAL GROUP®
Market Overview
November 2008
EXECUTIVE SUMMARY
E
mployment trends in the
Hoosier state capital continued to weaken in recent
months. Consequently, RED CAPITAL Research (RCR) project that
the pace of annual job formation will
fall from 14,100 (1.6%) last year to
4,000 (0.4%) in 2008, the weakest
rate of job creation since 2002.
The slowdown is largely attributable
to reduced hiring among business,
education and health service firms.
Combined, the sectors contributed
10,500 new jobs last year but only
2,200 in the first nine months of 2008.
In addition, business service firms
registered two consecutive months of
falling payrolls as 400 jobs were lost
year-over-year in August and 1,000
positions were eliminated in the
twelve-month period ended in September.
Subdued employment growth and an
abrupt increase in the size of the labor
force produced a sharp rise in metro
unemployment. The ratio increased
from 3.7% in September 2007 to
5.1% in September 2008. Still, the
metro rate compared favorably to the
5.8% and 6.0% figures from the state
and the US, respectively.
Based on our econometric model,
RCR forecast that Circle City employment levels will remain unchanged next year. The forecast
ranks 19th among the markets in the
RED 50; aggregated RED 50 payrolls
are expected to decline by 300,000
jobs in 2009.
Single-family housing in Indianapolis
is affordable but not necessarily a
return-rich investment. The National
Association of Realtors report a -4.5%
y-o-y decrease in the 3Q08 median
single-family home price ($117,900),
modest compared to the US metro
average decline of -9.0%. But the
metro median price was -1.9% below
the 3Q01 level ($120,200), whereas
SNAP SHOT
US home prices appreciated about
33% over the period.
Apartment occupancy continued to
improve in 3Q08 due to limited supply and steady demand. The average
occupancy rate increased 10 basis
points sequentially to 92.6%, the
highest rate recorded in 27 quarters.
Positive net absorption totaled 325
units in 3Q08, outpacing supply of
208 units. Likewise, robust demand
of 1,520 units produced a 130 basis
point improvement in occupancy during the twelve-month period ended in
September.
Although occupancy was higher,
owners faced resistance to rent increases. The pace of sequential effective rent growth decelerated from an
average of 1.0% from 1Q07 to 2Q08
to 0.3% in 3Q08. Similarly, asking
rents were unchanged quarter-overquarter, the first time the series failed
to advance since 1Q06.
Owners of Class A properties demonstrated a preference for boosting occupancy rather than rent. The average
Class A asking rent fell -0.4% in
3Q08, contributing to the 30 basis
point advance in the sector’s occupancy rate. Conversely, Class B/C
assets produced a modest 0.3% rent
increase and maintained occupancy.
Metro asset trade activity was relatively thin year-to-date. According to
Real Capital Analytics sales volume
fell 46% y-o-y to $188.3 million in
2008. A majority of trades involved
Class B- assets. The average price
per unit was $48,609 and the average
cap rate was 8.2%.
Owing to the discounted upfront yield
and relative stability, RCR recommend that investors “Accumulate”
Indy assets. The metro ranks 2nd
among the RED 50 with regard to
expected total returns and 7th highest
on a risk-adjusted basis.
Y-o-y
change
Vacancy
(7.4% - 3Q08)
Effective
Rents
130bps
Projected
2008
20bps
3.6%
2.2%
N/A
N/A
1.9k
4k
($638 - 3Q08)
Cap Rate
(N/A - 3Q08)
Employment
(922.7k - 3Q08)
KEY POINTS
•
The metro vacancy rate decreased 10 basis
points sequentially and 130 basis points
year-over-year to 7.4% in 3Q08. Tenant
demand was particularly strong for Class A
assets as the vacancy rate fell 30 basis points
sequentially to 6.3%. Vacancy for Class B/C
assets was unchanged due to sluggish
demand and no supply.
•
At 3.6%, year-over-year effective rent
growth remained above 3% for the fourth
consecutive quarter. But Reis expect annual
effective rent growth to decelerate sharply to
1.6% by YE 2009.
•
Hampered by rent decreases among Class A
properties, the metro average asking rent was
unchanged sequentially. The average Class
A rent fell -0.4% to $776, while Class B/C
assets achieved a 0.3% rent gain.
•
According to the National Association of
home fell -4.5% year-over-year to $117,900
in 3Q08.
•
Real Capital Analytics count 13 transactions
totaling $188.3 million in sales proceeds in
the first nine months of 2008. The average
price per unit increased 2.9% to $48,609.
VACANCY TRENDS
•
•
The vacancy rate fell 10 basis sequentially to 7.4% in 3Q08. Positive
net absorption of 325 units was recorded, outpacing the 208 units of
supply. Average Class A vacancy fell 30 basis points sequentially to
6.3% while the Class B/C vacancy rate remained unchanged at 8.2%.
Metro vacancy dropped 130 basis points year-over-year owing to stout
demand and limited supply. Only 288 units were completed in the
twelve-month period ended in September, far shy of the 1,520 units
absorbed.
Reis expect weak tenant demand in 4Q08 to give rise to a 20 basis
point increase in vacancy. An up-tick in development is forecast to
result in a 40 basis point escalation in vacancy next year.
Source: Reis, Inc.
12%
Metro Vacancy Rate
•
10%
8.7%
8%
7.4%
6%
4%
Indianapolis
U.S.A.
2%
0%
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q
00 01 01 02 03 04 04 05 06 07 07 08
RENT TRENDS
•
•
•
Source: Reis, Inc.
The average effective rent increased 0.3% sequentially and 3.6% yearover-year to $638 in 3Q08. The pace of annual growth was down from
the 4Q07 cyclical peak of 4.3%.
Effective rents in the East and Central submarkets advanced at
relatively robust 2.0% sequential pace.
Average asking rent was unchanged quarter-over-quarter and 2.7%
above the 3Q07 level. The average asking rent among Class A assets
fell -0.4% sequentially to $776. By comparison, Class B/C properties
achieved a 0.3% rent increase.
YoY Rent Trend
•
Metro Rent Trends
Effective rents are expected to grow at a more modest pace over the
next few years. Reis forecast year-over-year effective rent growth of
1.6% in 2009 and 2.3% in 2010.
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
2.7%
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q
00 01 01 02 03 04 04 05 06 07 07 08
th
RANK: 24 out of 50
•
•
Source: Reis, Inc.
Multifamily assets sales activity declined in the first nine months of
2008. Real Capital Analytics count 13 trades totaling $188.3 million
sales proceeds this year, down 46% from the $364 million in
transaction volume recorded during the same period last year.
The average cap rate was 8.2% among properties sold this year, 100
basis points above the average yield from a year ago. The average
price per unit rose 2.9% to $48,609.
At 7.0%, the generic metro asset five-year holding period total return
ranked 2nd among RED 50. In addition, low levels of historic revenue
growth volatility helped Indianapolis produce a top ten measure of
risk-adjusted returns.
8%
Cap Rate
•
3.6%
Asking
Effective
7%
6%
5%
3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
06
06
07
07
07
07
08
08
08
Property Name
Four Property Portfolio
Harrison Place
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
Various
A
September 2008
August 2008
$76.8
$21.1
$42,946
$68,664
8.6%
6.4%
Source: Metro Indianapolis Board of Realtors
•
$130
Prices (000)
$125
•
$120
$115
$110
•
$105
$100
04
05
06
Y
Y
Y
•
3Q 4Q 1Q 2Q 3Q
07
07
08
08
08
•
Annual Chg (000)
25
20
15
10
4
0
0
•
99 00 01 02 03 04 05 06 07 08f 09f
•
Source: BLS
5%
Rate
According to RealtyTrac.com, 0.82% of metro homes were in
foreclosure in 3Q08, the 28th highest rate among the 100 largest US
metro areas. On a positive note, the number of properties with filings
(6,029) was down -0.5% from the previous quarter.
Year-over-year payroll growth decelerated throughout the year. A net
of 12,400 (1.4%) jobs were created in the twelve-month period ended
in January, and the pace of increase slowed to 4,600 (0.5%) y-o-y in
July. Surprisingly, August payroll data showed a -600 (-0.2%) job net
decline. But the headline tally is somewhat misleading as the decrease is largely attributable to a -3,200 job loss among local school
district payrolls; a function of the strong (6,100-job) year-over-year
comparison.
Third Quarter 2008
-5
•
Indianapolis
USA
3%
HousingTracker.net report that the median asking price increased 3.6%
year-over-year to $144,900 in October.
Past 12 Months
30
4%
The median price of a single-family home in Indianapolis fell -5.0%
year-over-year to $119,750 in 3Q08. Home sales velocity decreased
15% year-over-year as 26,196 units were sold in the twelve-month
period ended in September.
EMPLOYMENT TRENDS
5
Tactician Corporation estimate that the population of Indianapolis
increased 2.0% in 2008. The source project metro population growth
of 1.3% per year from 2009 to 2013.
2%
Annual employment growth slowed from 5,800 (0.7%) in 2Q08 to
1,900 (0.2%) in 3Q08, partially due to the weak August datum. But
September growth was only a modestly better 1,800-job net advance,
indicating that the Indianapolis economy is poised to endure hardship.
Job trends among finance and wholesale trade firms turned negative
in 3Q08. The sectors trimmed a combined 900 jobs from payrolls,
after adding 500 positions year-over-year in 2Q08.
Likewise, conditions continued to deteriorate for business service
firms. The sector added a monthly year-over-year average of 5,600
jobs in 2007, but quarterly year-over-year growth slowed to 1,600 in
1Q08 and 200 in 2Q08. Last quarter, payrolls actually contracted as
the sector cut 200 jobs.
1%
Forecast
0%
•
-1%
-2%
Employment growth will remain sluggish over the next several
months. Our econometric model generates point estimates of 4,000
(0.4%) new jobs this year and no change in 2009.
99 00 01 02 03 04 05 06 07 08
15%
10%
5%
Indianapolis
4.3%
4.3%
Colum bus
5.9%
5.9%
7.0%
6.9%
8.1%
7.9%
9.6%
9.4%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Submarket
Effective Rent
Physical Vacancy
3Q07
3Q08
Change
3Q07
3Q08
Southwest / Johnson
Southeast
West
Near Northwest
Far Northwest
East
Castleton
Far Northeast
Central
Boone / Hendricks
Hancock / Shelby
Hamilton County
$577
$583
$543
$583
$638
$524
$694
$536
$743
$754
$611
$762
$599
$605
$563
$587
$655
$555
$719
$548
$800
$789
$624
$787
3.8%
3.8%
3.7%
0.7%
2.7%
5.9%
3.6%
2.2%
7.7%
4.6%
2.1%
3.3%
9.0%
12.0%
9.5%
8.8%
7.9%
11.7%
7.1%
9.3%
4.8%
7.2%
7.0%
7.1%
7.0%
8.8%
8.7%
8.1%
5.9%
8.8%
6.6%
8.6%
3.2%
5.4%
6.1%
7.3%
-200 bps
-320 bps
-80 bps
-70 bps
-200 bps
-290 bps
-50 bps
-70 bps
-160 bps
-180 bps
-90 bps
20 bps
Metro
$616
$638
3.6%
8.7%
7.4%
-130 bps
SUPPLY TRENDS
•
•
•
Source: Reis, Inc
Developers completed one project totaling 208 units in 3Q08, the
metro’s first apartment delivery this year. Reis expect 164 units of
supply in 4Q08.
In 2009, apartment completions are forecast to rise to 1,007 units, the
highest annual total since 2004. According to Reis, 767 units were
under construction and slated for completion next year. Another 2,222
units were in the planned or proposed pipeline.
2,000
1,500
1,000
500
Units
•
Change
The Hamilton County submarket is expected to experience the greatest
amount of supply next year as 549 units are slated for completion.
0
-500
Completions
Absorption
-1,000
A total of nine developments containing 760 condo units were under
construction in October.
-1,500
02
03
04
05
06
07
08f
09f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
800.837.5100
Columbus, OH_Boston, MA_Charlotte, NC_Chicago, IL
Denver, CO_Fredericksburg, TX_Irving, TX_Jupiter, FL_Linwood, NJ_Nashville, TN
Newport Beach,CA_Reston, VA_San Diego, CA_Syracuse, NY
Market Overview is a publication of RED CAPITAL GROUP. If you are interested in other metro areas we cover or would like to
read about the research methodology we apply in our reports, please visit us at www.redcapitalgroup.com/research.
RED CAPITAL GROUP®
Market Overview
September 2008
EXECUTIVE SUMMARY
T
he pace of metro payroll
growth decelerated sharply in
2Q08. Area establishments
added 11,500 (1.3%) workers yearover-year in 1Q08 but only 5,800
(0.7%) in 2Q08. Slower growth produced a swift increase in the metro
unemployment rate from 4.0% in June
2007 to 5.2% in June 2008.
The slowdown was partially attributable to reduced hiring among business
service firms. Sluggish trends in the
sector were largely due to declining
demand for temp agency workers;
employment service firms added 600
positions to payrolls in 1Q08 and cut
300 jobs in 2Q08.
Slower expansion among health care
establishments was also to blame.
Following a 3,200-job advance in
1Q08, job growth dwindled to 1,800
y-o-y in 2Q08 and 1,400 in August.
RED CAPITAL Research (RCR)
expect job growth to stabilize over the
next several months. Our econometric model generates a point estimate
of 4,000 (0.4%) new jobs per year in
2008 and 2009. The confidence intervals range from 3,000 (0.3%) to 9,000
(0.7%) this year and from no growth
to 9,000 (1.0%) new jobs in 2009.
Metro home price trends remained
weak in 2Q08 due to tight mortgage
underwriting standards and foreclosure levels. According to the National Association of Realtors, the
median price of a single-family home
fell 5.5% y-o-y to $118,400 in Indianapolis. Despite a 4.3% decrease in
the home foreclosure rate, the metro
exhibited the 30th highest rate among
the 100 largest metro areas.
The occupancy rate rose 60 basis
points sequentially to 92.5% in 2Q08.
The increase was attributable strong
tenant demand as 587 leases were
netted. On an annual basis, occupancy climbed 160 bps from 90.9% in
SNAP SHOT
2Q07. Only 80 units were completed
in the twelve-month period ended in
June, far short of the 1,632 unit absorptions.
Strong tenant demand gave rise to
above average rent increases. The
average effective rent advanced 1.1%
sequentially and 3.9% y-o-y. By
comparison, y-o-y effective rent
growth averaged 0.9% from 2000 to
2007. Owners also managed to decrease concessions from an average of
5.8% of asking rent in 2Q07 to 5.5%
in 2Q08.
Reis expect market conditions to
moderate over the next few years as
supply pressures limit revenue
growth. The service projects 1,447
unit completions from 3Q08 to 4Q09,
resulting in a 100 basis point decrease
in occupancy. Effective rent growth
is forecast to decelerate to 2.7% by
2010.
The strongest pace of effective rent
growth was recorded in the Central
submarket. Average effective rents
increased 3.0% sequentially and 6.8%
y-o-y to $784.
The submarket
boasted the highest occupancy rate
(95.4%) among the metro’s twelve
submarkets.
Real Capital Analytics report seven
trades involving properties priced at
or above $5 million from January to
July 2008. Sales volume totaled
$84.2 million and the average price
was $48,778 per unit. By comparison, assets valued at $231.8 million
sold in the same period last year with
an average price of $55,877 per unit.
At a generic going-in yield of 6.5%,
RCR estimate a 7.9% expected rate
of return, the 7th highest rate among
the RED 50. In addition, relatively
stable historic revenue growth produces above average risk-adjusted
returns. On this basis, we assign an
“Accumulate” rating.
Y-o-y
change
Vacancy
(7.5% - 2Q08)
Effective
Rents
160bps
Projected
2008
30bps
3.9%
3.0%
20bps
unch
5.8k
4k
($636 - 2Q08)
Cap Rate
(7.7% - 2Q08)
Employment
(927k - 2Q08)
KEY POINTS
•
•
•
•
The metro vacancy rate fell 60 basis points
sequentially and 160 basis points year-overyear to 7.5% in 2Q08. The improvement
was largely attributable to strong tenant
demand and limited supply. Positive net
absorption totaled 1,632 units from 3Q07 to
2Q08, outpacing supply of 80 units.
and 3.9% year-over-year, respectively, in
2Q08. Effective rent growth exceeded 2.5%
for the 6th consecutive quarter. The value of
the typical concession package fell from
5.8% of asking rent in 2Q07 to 5.5% in
2Q08.
The Central and Boone / Hendricks
submarkets posted annual effective rent
growth rates above 6.0%. The highest
effective rent levels were observed in the
Hamilton County submarket ($795), which
produced a 5.6% y-o-y gain.
Transaction volume fell sharply year-to-date.
Sales volume totaled $231.8 million in the
first seven months last year. But only $84.2
million in sales proceeds were generated in
the comparable period of 2008. The average
price per unit fell 12.7% to $48,778.
VACANCY TRENDS
•
•
Robust tenant demand and limited supply gave rise to a sharp decrease
in the metro vacancy rate. Vacancy fell 60 basis points sequentially
and 160 basis points year-over-year to 7.5% in 2Q08.
The weak housing market produced strong demand for Class A rentals.
According to Marcus and Millichap, the vacancy rate among Class A
properties fell 190 basis points year-over-year to 6.6% in 2Q08. By
comparison, Class B/C assets posted a 140 basis point decrease in
vacancy to 8.2%.
Source: Reis, Inc.
12%
Metro Vacancy Rate
•
9.1%
10%
7.5%
8%
6%
4%
Indianapolis
U.S.A.
2%
Reis expect vacancy to creep up during the next few years. Sluggish
demand and increased supply are forecast to give rise to an 8.5%
vacancy rate by YE 2009.
0%
1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q
00 00 01 02 03 03 04 05 06 06 07 08
RENT TRENDS
•
•
•
Source: Reis, Inc.
The pace of sequential effective rent growth accelerated to 1.1%,
following a 0.6% advance in the previous period. Effective rents rose
3.9% annually, outpacing the 3.5% increase in asking rents for the 15th
consecutive quarter.
According to Marcus & Millichap, asking rents for Class A properties
increased 3.6% year-over-year to $778 in 2Q08. Class BC assets
experienced a moderately slower 3.4% rate of growth.
The Central submarket realized the strongest rent effective rent gains in
the metro area. The average effective rent increased 3.0% sequentially
and 6.8% year-over-year to $784 in 2Q08.
YoY Rent Trend
•
Metro Rent Trends
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
Reis expect metro year-over-year effective rent growth to decelerate to
3.0% per year in 2008 and 2009.
00 00 01 02 03 03 04 05 06 06 07 08
RANK: 28 out of 50
•
Reis count two property trades in 2Q08, with an average cap rate of
7.5%. The yield was down 20 basis points from the 7.7% average cap
rate recorded in 2Q07.
Based on an assumed going-in yield of 6.5%, RCR estimate an
expected rate of total return of 7.9%, ranking 7th among the RED 50.
Stable historic revenue growth gives rise to a comparatively high
measure of risk-adjusted returns. We affirm our “Accumulate”
ranking.
Source: Reis, Inc.
8%
7%
Cap Rate
•
According to Real Capital Analytics, seven investor-grade metro assets
traded from January to July 2008, totaling $84.2 million in sales
proceeds. By comparison, sales volume totaled $231.8 million in the
same period of 2007. The average price per unit fell 12.7% year-overyear to $48,778 in the first seven months of 2008.
3.5%
1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q
th
•
3.9%
Asking
Effective
6%
5%
4%
2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
06
06
06 07
07
07 07
08
08
Property Name
Harrison Place
Mann Village
Riverchase Apartments
Atrium Village
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
BC
A
Senior
August 2008
June 2008
June 2008
June 2008
$21.1
$14.4
$14.4
$5.9
$68,664
$42,857
$66,667
$50,862
7.2%
8.3%
6.8%
7.4%
$240
MSA
Prices (000)
$220
•
US
•
$200
$180
•
$160
$140
$120
•
$100
04
05
06
Y
Y
Y
2Q 3Q 4Q 1Q 2Q
07
07
07
08
08
•
Annual Chg (000)
25
20
15
•
10
4
4
0
•
-5
99 00 01 02 03 04 05 06 07 08f 09f
Source: BLS
5%
Indianapolis
USA
Rate
•
1%
•
0%
-1%
-2%
02 03 04 05
Likewise, health care firms expanded at a slower pace in 2Q08. The
3,200-job advance in 1Q08 was followed by a 1,800-job expansion in
2Q08.
Job attrition among construction firms was partially to blame. Builders laid off 300 workers year-over-year in 2Q08.
Preliminary data August revealed that job trends turned negative as
600 positions were eliminated from payrolls in the twelve-month
period ended in August. But RCR are somewhat skeptical regarding
this result as local government education establishments posted a
-3,200 job loss. Historically, the BLS has a difficult time accurately
accounting for summer employment levels for school teachers.
Our econometric model generates a point estimate of 4,000 (0.4%)
new jobs per year in 2008 and 2009.
Economy.com are largely in agreement for 2008 job growth but the
source forecasts a 19,530 (2.5%) job increase in 2009.
06 07 08
15%
10%
The pace of year-over-year payroll growth decelerated sharply from
11,500 (1.3%) in 1Q08 to 5,800 (0.7%) in 2Q08. The slowdown was
largely attributable to reduced hiring among business service firms.
The sector hired 1,600 workers year-over-year in 1Q08 but only 200
in 2Q08.
Forecast
2%
99 00 01
RealtyTrac report that the metro exhibited the 30th highest foreclosure
rate among the 100 largest MSAs. The source noted that one in every
122 metro homes was in foreclosure in 2Q08, a 4.3% improvement
from the previous quarter.
August 2008
•
3%
Indianapolis home values rose 1.7% year-over-year in 2Q08, according
to the OFHEO home price index. The increase ranked 97th among the
292 markets tracked by the source.
Second Quarter 2008
30
4%
The median price of a single-family MSA home fell 5.5% year-overyear from $125,300 in 2Q07 to $118,400 in 2Q08. Condo prices fell
6.7% to $113,500.
EMPLOYMENT TRENDS
5
The pace of metro population growth remained firm at 1.5%, largely
due to strong net domestic migration flows.
Indianapolis
5.6%
5.3%
Colum bus
6.9%
7.1%
7.9%
8.1%
8.9%
9.1%
10.4%
10.6%
5%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Effective Rent
Physical Vacancy
Submarket
2Q07
2Q08
Change
2Q07
2Q08
Southwest / Johnson
Southeast
West
Near Northwest
Far Northwest
East
Castleton
Far Northeast
Central
Boone / Hendricks
Hancock / Shelby
Hamilton County
$570
$590
$547
$570
$635
$523
$685
$539
$734
$732
$612
$753
$599
$602
$565
$585
$647
$544
$712
$553
$784
$778
$626
$795
5.1%
2.0%
3.3%
2.6%
1.9%
4.0%
3.9%
2.6%
6.8%
6.3%
2.3%
5.6%
9.5%
10.7%
10.0%
8.2%
9.0%
9.5%
8.0%
10.9%
4.5%
8.0%
6.2%
8.3%
7.6%
9.9%
8.8%
7.4%
6.9%
9.0%
6.5%
7.1%
4.6%
7.2%
4.9%
6.8%
-190 bps
-80 bps
-120 bps
-80 bps
-210 bps
-50 bps
-150 bps
-380 bps
10 bps
-80 bps
-130 bps
-150 bps
Metro
$612
$636
3.9%
9.1%
7.5%
-160 bps
SUPPLY TRENDS
•
•
Source: Reis, Inc
No units were completed in 1H08 and only 80 deliveries were recorded
in the twelve-month period ended in June. Recent Reis reportage
shows that one asset containing 208 units was completed in July. Reis
expect one other property to reach construction completion this year.
The 164-unit development is slated for completion in October.
Reis are aware of two other properties that were under construction as
of September 15th. Both assets are slated to open in 2009, adding 549
units to the metro rental stock. Reis expect another 526 apartment
units to open in 2009.
2,000
Completions
Absorption
1,500
1,000
500
Units
•
Change
0
-500
-1,000
Nine condo projects were under construction, containing a total of 760
units. Another 1,376 condo units were in the planned or proposed
stages.
-1,500
02
03
04
05
06
07
08f
09f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
800_837_5100
Columbus, OH_Boston, MA_Charlotte, NC_Chicago, IL
Denver, CO_Fredericksburg, TX_Irving, TX_Jupiter, FL_Linwood, NJ_Nashville, TN
Newport Beach,CA_Reston, VA_San Diego, CA_Syracuse, NY_Voorhees, NJ
©2006 RED CAPITAL GROUP (8/9/06)
RED CAPITAL GROUP®
Market Overview
June 2008
EXECUTIVE SUMMARY
T
he Circle City economy
posted another year of solid
employment growth in 2007.
Job creation of 14,100 (1.6%) arose
from substantial contributions from
the transportation / warehousing,
business service, health care and government sectors. In addition, total
employment growth resulted in a decrease in the unemployment rate from
4.3% in 2006 to 4.0%.
After continued strength in January
and February, payroll trends decelerated sharply. A net of 7,100 (0.8%)
workers were added year-over-year in
March, as compared to 14,900 (1.7%)
in February. The weakness was particularly acute in the business service
sector. Professional service providers
reduced hiring from 1,000 y-o-y in
January to 200 in April. Likewise,
administrative support firms added
400 workers y-o-y in April, down
from 1,600 in January.
RED expect payroll growth to remain
limited through 2009. Our econometric model generates point estimates of
5,000 (0.5%) new jobs this year and
4,000 (0.4%) in 2009. Conversely,
Economy.com anticipate a modest
slowdown this year but robust growth
for 2009. Specifically, the source
project 6,840 (0.7%) net new jobs in
2008 and 20,490 (2.2%) for 2009.
Although Indianapolis did not participate in the rapid home price appreciation earlier in the decade, the metro is
not immune to deteriorating housing
market conditions. The National Association of Realtors calculate a median single-family home price of
$107,300 in 1Q08, a metric that reflects a 3.2% decrease from the median price observed in 1999. On a
positive note, the metro exhibited a
relatively stable trend in the OFHEO
home price index. The source calculates a 1.7% y-o-y increase in home
prices in 1Q08. To put this in con-
SNAP SHOT
text, OFHEO estimate that metro
home prices rose 11.9% over the past
five years, equating to a compound
average annual growth rate of 2.3%.
The metro occupancy rate increased
20 basis points sequentially to 91.9%
in 1Q08. Apartment demand was
steady as 233 net leases were signed.
Developers did not add any product to
the market. Occupancy rallied 160
bps in the twelve-month period ended
in March, owing to robust absorption
and limited supply.
Owners achieved a 0.6% sequential
effective rent gain in 1Q08, substantially slower than the 1.5% pace observed in 4Q07. The average effective rent rose 3.6% y-o-y, outpacing
the advance in asking rent for the 14th
consecutive quarter.
Reis are pessimistic with regard to
fundamentals. The service expects
occupancy to fall as owners lose tenants through the remainder of the
year. In response, Reis believe that
owners will adopt a less aggressive
pricing strategy and achieve a 2.6%
annual effective rent increase in 2008.
RED believe that a large scale move
toward owner tenancy is unlikely to
occur this year and therefore occupancy is more likely to rise than fall.
This leads us to be more optimistic
regarding rent growth as well.
Multifamily trade activity was sluggish in recent months. We identify
only three trades of properties priced
at or above $2 million from January
to May 2008. From our assessment of
these transactions, we assign a 6.5%
cap rate to generic metro asset investment. This produces a 7.7% expected
rate of total return and a top-10 measure of risk-adjusted returns assuming
Reis forecasts for rent and occupancy
trends. As a result, we assign a cautious “Accumulate” ranking. In the
long run, we are concerned about
competition from for-sale housing.
Y-o-y
change
Vacancy
(8.1% - 1Q08)
Effective
Rents
160bps
Projected
2008
60bps
3.6%
2.6%
N/A
N/A
11.5k
5k
($629 - 1Q08)
Cap Rate
(6.7% - 1Q08)
Employment
(907.1k - 1Q08)
KEY POINTS
•
•
•
•
•
The metro vacancy rate fell 20 basis points
sequentially and 160 basis points year-overyear. The latter was the second largest
improvement in the RED 50.
and 3.6% year-over-year, respectively in
1Q08. The size of the average concession
package fell from 6.0% of asking rent in
1Q07 to 5.8% in 1Q08.
At $107,300, the 1Q08 median single-family
home price in Indianapolis was the second
lowest among RED 50 markets.
Payroll growth remained firm in 2007 as
metro establishments added 14,100 (1.6%)
workers. RED expect slower growth this
year as only 5,000 (0.5%) new jobs are
added.
Based on a going-in yield of 6.5%, RED
estimate a 7.7% expected rate of total return.
The metric ranked 6th highest among the
RED 50. In addition, low historic volatility
gives rise to attractive risk-adjusted returns,
earning Indianapolis an Accumulate
ranking. However, buyers should proceed
with caution due to the affordability of forsale housing.
VACANCY TRENDS
•
•
Apartment demand was solid in 1Q08 as positive net absorption totaled
233 units. The vacancy rate fell 20 basis points sequentially as a result.
No additions to supply were recorded.
The vacancy rate decreased 160 basis points year-over-year as tenant
demand of 1,812 units outpaced supply of 128 units. The annual
improvement ranked second among the RED 50, behind only
Cincinnati (-170 bps).
Reis are pessimistic with regard to trends in the remainder of the year.
The service forecasts negative net absorption of 280 units from 2Q08
to 4Q08. Consequently, the vacancy rate will rise 60 basis points to
8.7%.
Source: Reis, Inc.
12%
Metro Vacancy Rate
•
9.7%
10%
8.1%
8%
6%
4%
Indianapolis
U.S.A.
2%
0%
3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
COMMENT: Our internal model projects a vacancy rate of 7.8% at year-end.
00 01 02 02 03 04 05 05 06 07 08
RENT TRENDS
•
•
Source: Reis, Inc.
Following robust gains of 1.5% sequentially and 4.3% year-over-year
in 4Q07, effective rent growth decelerated in 1Q08. The average
effective rent rose 0.6% quarter-over-quarter and 3.6% year-over-year.
Asking rents grew at a modestly slower 3.4% annual pace to $668.
The value of the average concession package fell from 6.0% of asking
rent in 1Q07 to 5.8% in 1Q08. The average 1Q08 RED 50 concession
ratio was 5.7% of asking rent.
Reis expect effective rent growth to decelerate to 2.6% in 2008 and
2.8% in 2009.
YoY Rent Trend
•
Metro Rent Trends
COMMENT: The RCR effective rent growth model suggests that the pace of
effective rent growth will exceed the Reis forecast.
3.6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
Asking
Effective
3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
00 01 02 02 03 04 05 05 06 07 08
•
•
Source: Reis, Inc.
8.0%
Real Capital Analytics count five investor grade property trades
totaling $91 million in sales proceeds in the six-month period ended in
March. The average price per unit was $86,401.
Our research uncovered three trades of properties priced at or above $2
million in the first five months of 2008. The weighted average price
per unit was $56,261 and the weighted average cap rate was 6.7%.
At an assumed going-in yield of 6.5%, RED estimate generic metro
asset five-year holding period total returns of 7.7%, the 6th highest
among the RED 50. The metro ranks 9th with regard to risk-adjusted
returns.
COMMENT: Despite Reis pessimism, Indianapolis ranks among the top ten
markets for risk-adjusted and expected rates of total return. Relatively high
going-in yields contribute to the metro’s outstanding performance profile.
7.0%
Cap Rate
•
3.4%
6.0%
5.0%
4.0%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
06
06
06
06
07
07
07
07
08
Property Name
Riverchase Apartments
The Bristol Apartments
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
A
April 2008
February 2008
$14.4
$15.7
$66,667
$74,171
6.8%
6.5%
$240
MSA
Prices (000)
$220
•
US
•
$200
$180
•
$160
$140
$120
$100
04
05
06
Y
Y
Y
•
1Q 2Q 3Q 4Q 1Q
07
07
07
07
08
The National Association of Realtors report a 1Q08 median singlefamily home price of $107,300, 4.6% below the 1Q07 comparison.
The metric was also lower than the metro’s median price reported for
1999 ($110,900).
Indianapolis registered a 1.7% year-over-year increase in the OFHEO
home price index in 1Q08. The improvement ranked 134th among the
292 markets tracked by the source.
Past 12 Months
•
30
25
Annual Chg (000)
The homeownership rate fell 310 basis points from 79.0% in 2006 to
75.9%.
EMPLOYMENT TRENDS
20
15
Job trends remained strong in 2007 as metro establishments added
14,100 (1.6%) workers to payrolls. Sluggish growth among construction and manufacturing firms were balanced by increased hiring by
skilled service businesses.
First Quarter 2008
10
5
5
•
4
0
-5
99 00 01 02 03 04 05 06 07 08f 09f
•
Source: BLS
5%
3%
•
2%
1%
0%
•
-1%
-2%
99
00
01
02
03
04
05 06
Year-over-year payroll growth was robust in January and February as
net job creation average 13,700 (1.6%). The pace of expansion decelerated sharply in March as 7,100 (0.8%) workers were added yearover-year. Preliminary data show that slower growth persisted in
April.
Sluggish growth among business service firms was partially responsible. Establishments engaged in professional and technical services
hired 1,000 workers year-over-year in January but only 200 in April.
Attrition among employment service agencies also contributed. The
sector added 1,800 jobs year-over-year in February but lost 100 workers in March.
Forecast
Indianapolis
USA
4%
Rate
At 1.5%, the rate of metro population growth remained strong in 2007.
The metro benefited from positive domestic and international net
migration.
07
08
RED anticipate slow but positive job growth through 2009. Our
econometric model generates point estimates of 5,000 (0.5%) new
jobs in 2008 and 4,000 in 2009. The confidence intervals range from
3,000 to 8,000 jobs this year and from no growth to 8,000 new jobs in
2009.
Economy.com are more optimistic. The service project job creation
of 6,840 (0.7%) in 2008 and 20,490 (2.2%) in 2009.
COMMENT: If Economy.com are right, the 2009 job tally will be the metro’s
greatest since 2000.
15%
10%
Indianapolis
5.1%
4.9%
5%
Colum bus
6.6%
6.4%
7.7%
7.4%
8.8%
8.4%
10.2%
9.9%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Effective Rent
Physical Vacancy
Submarket
1Q07
1Q08
Change
1Q07
1Q08
Southwest / Johnson
Southeast
West
Near Northwest
Far Northwest
East
Castleton
Far Northeast
Central
Boone / Hendricks
Hancock / Shelby
Hamilton County
$571
$584
$547
$558
$625
$514
$671
$539
$731
$717
$609
$750
$586
$585
$555
$590
$650
$536
$708
$548
$760
$768
$614
$788
2.6%
0.1%
1.5%
5.8%
3.9%
4.2%
5.5%
1.7%
4.0%
7.0%
0.8%
5.0%
10.9%
13.1%
10.4%
8.6%
9.8%
9.1%
8.7%
8.5%
4.0%
8.6%
6.8%
9.6%
8.4%
10.5%
9.6%
8.1%
7.4%
9.9%
7.1%
7.5%
4.0%
8.8%
6.1%
6.2%
-250 bps
-260 bps
-80 bps
-50 bps
-240 bps
80 bps
-160 bps
-100 bps
unchg
20 bps
-70 bps
-340 bps
Metro
$607
$629
3.6%
9.7%
8.1%
-160 bps
SUPPLY TRENDS
•
•
Source: Reis, Inc
No units were completed in 1Q08 and only 128 units were added in the
twelve-month period ended in March. Eighty of the units were
completed in the Boone / Hendricks submarket and the rest were
delivered in the Hamilton County submarket.
Reis are aware of two projects containing 372 apartment units that are
scheduled to come on-line this year. One project is located in the
Hamilton County submarket. The development contains 208 units and
is slated for delivery in 4Q08. The other project, located in the Central
submarket, is scheduled to open in August.
2,000
1,500
1,000
500
Units
•
Change
0
-500
Completions
Absorption
-1,000
Six condo projects were under construction in the Central submarket as
of June. In total, the projects contain 388 units. One additional condo
project containing 250 units was in the planning phase.
-1,500
02
03
04
05
06
07
08f
09f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
800_837_5100
Columbus, OH_Boston, MA_Bozeman, MT_Charlotte, NC_Chicago, IL
Fredericksburg, TX_Irving, TX_Jupiter, FL_Linwood, NJ_Nashville, TN
Newport Beach,CA_Reston, VA_San Diego, CA_Syracuse, NY_Voorhees, NJ
RED CAPITAL GROUP®
Market Overview
February 2008
EXECUTIVE SUMMARY
S
teady as she goes was the
watchword for Indianapolis
economic trends, as the
metro recorded its 24th consecutive
monthly year-over-year payroll
growth comparison between 1.0% and
1.8% in December. Boring perhaps,
but the results tower above trends
among Indy’s Mideast peers and compare well with the most dynamic
Heartland economies, including St.
Louis, Minneapolis and Kansas City.
After posting a robust 13,300 (1.5%)
year-over-year surge in 3Q07, metro
payrolls slowed moderately in the
fourth quarter to a 10,300-job, 1.1%
pace. The slowdown primarily was
attributable to decreased hiring in the
government and hospitality sectors
after especially torrid payroll growth
spurts in 3Q07. Otherwise, trends
were largely consistent with the prior
period save for faster hiring in trucking and warehousing, offset by marginally slower expansion in finance,
business services and health care.
For the FY2007, Indianapolis produced 11,400 (1.3%) payroll jobs,
down slightly from the 12,800 recorded in 2006. RED CAPITAL
Research expect conditions to be
marginally weaker in 2008, in line
with the national average. RCR’s
payroll forecast model generates a
4,000 to 12,000-job confidence interval, with point estimate of 8,000
(0.9%). A moderate acceleration is in
the cards for 2009, when the most
probable result edges up to 9,000
jobs, in a 5,000-13,000 job range.
In the past, the performance of multifamily properties in Indy was hampered by the affordability of for-sale
housing and consistently heavy apartment supply. Conditions were dramatically altered last year, however,
as home foreclosures and diminished
access to unconventional mortgage
financing reduced the appeal of
SNAP SHOT
homeownership and the combined
effect of higher construction costs and
weak operating performance discouraged apartment development activity
at last. Consequently, unit absorption
soared in the seasonally weak fourth
quarter to 521 units, nearly double the
276 units recorded in 4Q06, and a
21% advance from the seasonally
stronger third quarter. Occupancy
increased 40 basis points to 92.7%,
rising to the 8th best absolute gain
among the RED 50 markets.
Rent momentum was stronger still,
producing the largest one-quarter effective rent advance in the 18-year
Reis data series. Owners implemented a $8 (1.2%) face rent hike,
while trimming the average rent concession by $1, producing a $9 (1.5%)
effective rent increase in the process.
Over-the-year, rents were up 4.3%,
the largest one-year gain since 1996.
In spite of forecasts for steady job and
population growth, Reis expect apartment demand and rent trends to dive
in 2008. The service anticipate net
absorption to drop from 1,497 units
last year to 55, while supply rises 20
units to 497, causing average vacancy
to return to 8.7% and effective rent
trends to decline to 2.7%. RCR anticipate more favorable trends.
Property sales were thin due to scarcity of acquisition financing and investor caution. RCR identified three
$3mm+ trades October through January totaling $59mm of proceeds. This
compares to $380mm in FY07, as
reported by Real Capital Analytics.
The average price per unit was lower
on the year, falling -3% to $51,827.
RCR estimate generic 5-year holding
period total returns at 7.8%, unchanged from our previous analysis
and 5th highest in the RED 50. NOI
volatility is low, giving rise to appealing risk-adjusted returns, making Indy
an attractive high-yield market.
Y-o-y
change
Vacancy
(8.3% - 4Q07)
Effective
Rents
($625 - 4Q07)
100 bps
4.3%
Projected
2008
40 bps
2.7%
Cap Rate
(8.5% - 4Q07)
30 bps
Employment
(923.4m - 4Q07)
10.3m
8m
KEY POINTS
•
•
•
•
•
Indianapolis reported steady, near U.S.
average payroll growth in the fourth quarter,
posting a 10,300-job, 1.1% over-the-year
performance in 4Q07. The unemployment
rate was unchanged in December at a belowaverage 3.9% and down 30 bps on the year.
RCR expect job creation to decline to about
8m (0.9%) in 2008, and 9m (1.0%) in 2009.
Demand for apartments improved
significantly last year. April to December,
tenants absorbed a net of 1,579 units, up
from 1,078 units in the comparable period of
2006. Tenants net leased 521 units in the
seasonally weak fourth quarter, absorbing
nearly twice as many units as in 4Q06.
Owners achieved some of the strongest
sequential rent gains recorded over the past
two decades in 4Q. Average and effective
rents increased $8 (1.2%) and $9 (1.5%),
respectively, producing the best 1-year rent
growth registered since 1996: ($26/4.3%).
Indy offers investors high, low-volatility
yields, fashioning an attractive alternative for
yield-oriented investors. But RCR remain
concerned about competition from for-sale
housing. Invest opportunistically.
Indianapolis-Carmel, Indiana MSA 4Q 2007
VACANCY TRENDS
•
•
Renters net leased 1,579 units during the last nine months of 2007,
representing the strongest demand observed in a comparable period
since 2000, including 521 units in 4Q07. Occupancy increase 40 basis
points in the fourth quarter as a result, ranking as the 8th best absolute
advance observed in the RED 50.
Submarkets east of Downtown attracted the greatest 4th quarter tenant
interest. Submarket occupancy grew at rates ranging from 60 bps
(Castleton) to 120 bps (East) in the period. By contrast, suburban
demand was lackluster:.Boone / Hendricks saw average occupancy slip
140 bps sequentially, and Hancock / Shelby experienced a 60 bps
increases.
Source: Reis, Inc.
12%
9.3%
10%
Metro Vacancy Rate
•
8.3%
8%
6%
4%
INDIANAPOLIS
U.S.A.
2%
0%
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q
Indianapolis continued to sport the highest vacancy rate in the RED 50.
00 01 01 02 03 04 04 05 06 07 07
RENT TRENDS
•
•
•
Rent trends exhibited the sort of vitality associated with coastal barrier
protected markets in 4Q07. Average asking rent ascended $8 (1.2%) to
$663, and effective rent advanced $9 (1.5%) to $625, representing
some of the strongest one-quarter hikes obtained since 2000.
Effective rents grew 4.3% in 2007, the best 1-year increase since 1996.
Same store asking rents in Hamilton County increased $25 (3.1%) in
2H07. Effective rents skyrocketed $30 in the same period, representing
a 4% advance in only 6 months.
Reis decreased its forecast of compound effective rent growth in 2008
through 2010 to 2.7% from 2.8% previously, a smaller than average
downward adjustment. The comparable forecast for the top 80 U.S.
markets was reduced from 3.4% to 3.2%
Source: Reis, Inc.
YoY Rent Trend
•
Metro Rent Trends
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
00 01 01 02 03 04 04 05 06 07 07
RANK: 26 out of 50
PROPERTY MARKET & CAP RATE TREND
•
Fourth quarter trade was very thin. RCR observed only three property
exchanges valued at $3mm or more for total proceeds of $59mm. The
marquis trade of the quarter was the acquisition of City View of
Meridian, a forty-year old high rise on the city’s east side. The
property traded at $67,440 per unit to yield approximately 6.5%.
Repositioning trades also were popular.
Investors acquired
underperforming class-B properties with a view toward property and
marketing rehabilitation.
Source: Reis, Inc.
8.6%
8.4%
Cap Rate
•
Real Capital Analytics recorded 23 $5mm+ trades in 2007, for total
proceeds of $380mm. Velocity dropped -38% from 2006, and volume
declined -47%. The firm published an average cap rate of 7.1% (10
bps below the Midwest average) and average price per unit of $51,827.
3.8%
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q
th
•
4.3%
Asking
Effective
8.2%
8.0%
7.8%
7.6%
4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
05 06 06 06 06 07 07 07 07
City View at Meridian (East)
Eagle Pointe (Near Northwest)
Sandy Creek Woods (Hamilton)
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
B
BC
A
Dec-2007
Dec-2007
Oct-2007
$11.2
$29.5
$18.6
$67,440
N/M
$73,671
6.5%
N/M
5.3%
Indianapolis-Carmel, Indiana MSA 4Q 2007
$240
INDY
Prices (000)
$220
•
US
•
$200
$180
•
$160
$140
$120
•
$100
03
04
05
Y
Y
Y
4Q 1Q 2Q 3Q 4Q
06
07
07
07
•
Annual Chg (000)
25
20
15
9
8
•
5
0
-5
99 00 01 02 03 04 05 06 07 08f 09f
•
Indianapolis cemented its reputation as the “Steady-Eddie” of U.S.
metropolitan economies in 2007, delivering its fifth consecutive payroll payroll vintage between 8,000 and 13,000 jobs. The MSA produced 11,400 jobs last year, down from 12,800 in 2006.
Job creation levels in two core competencies — business and health
care services– were down considerably last year, falling from a combined 6,900 in 2006 to 3,200. Healthy tourism and convention business was compensating, however; the hospitality and leisure services
industry hired 1,400 more workers last year than 2006, and the retail
sector turned a 600 job loss in 2006 into a 1,300-job gain.
Motor vehicle and pharmaceutical manufacturing continue to act as
drags on the local economy. The former cut a net of 400 jobs last
year, the latter 300.
Fourth Quarter 2007
•
Source: BLS
INDIANAPOLIS
USA
3%
Rate
Over 1,500 condo and co-op units are listed for sale in the Indianapolis
area, representing a shadow supply risk in a slow sales environment.
Past 12 Months
30
4%
Although price trends are stagnant, the inventory of unsold homes is
not growing as it is in many U.S. real estate markets
Housingtracker.net report that the number of homes listed for sale
increased only 1.8% in the twelve months ended February 12.
EMPLOYMENT TRENDS
5%
The median priced home in 4Q07 traded at $114,000, down -2.6%
year-over-year, superior to the –3.2% Midwest region nrom.
07
10
The National Association of Realtors report that the median priced
Indianapolis home traded at $120,500 in 2007, $600 less than 2003.
After a robust 3Q07, when Indy payrolls expanded at a 13,300 (1.3%)
annual pace, job growth slowed to 10,400 in the fourth quarter. The
slowdown was attributable to moderate weakness in the skilled services, government and manufacturing and considerably slower expansion in the hospitality sector.
2%
•
1%
Forecast
0%
•
-1%
-2%
99
00
01
02
03
04
05
06
07
Unemployment held firm at 3.9% in December, down 20 bps y-o-y.
The RED econometric payroll model anticipates more steady, moderate payroll growth in Speedway City. The model produces point
estimates of 8,000 jobs for 2008, and 9,000 jobs for 2009. Applicable
confidence intervals are 4,000 to 12,000 and 5,000 to 13,000. The
1.0% growth projection ranks 34th among the RED 50.
15%
Indianapolis (RAI=3.88)
10%
6.4%
5.2%
Louisville (RAI=6.56)
7.8%
7.3%
6.7%
8.0%
8.8%
8.9%
10.3%
9.5%
5%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Effective Rent
Physical Vacancy
Submarket
4Q06
4Q07
Change
4Q06
$
562
$
584
3.9%
9.1%
8.9%
-20 bps
Southeast Indianapolis
West Indianapolis
Near Northwest
Far Northwest
East Indianapolis
Castleton
Far Northeast
Central
Boone / Hendricks
Hancock Co / Shelby Co.
Hamilton County
Metro
$
$
$
$
$
$
$
$
$
$
$
$
579
540
556
616
513
658
528
720
705
613
744
599
$ 591
$ 550
$ 585
$ 645
$ 528
$ 707
$ 540
$ 752
$ 762
$ 612
$ 780
$ 625
2.1%
1.8%
5.3%
4.7%
3.0%
7.4%
2.3%
4.5%
8.0%
-0.2%
4.9%
3.8%
12.5%
11.2%
8.9%
10.6%
10.0%
7.5%
8.8%
4.4%
5.5%
6.3%
8.7%
9.3%
11.1%
9.2%
8.7%
7.6%
10.5%
6.5%
8.3%
4.5%
8.6%
7.6%
6.4%
8.3%
-140 bps
-200 bps
-20 bps
-300 bps
50 bps
-100 bps
-50 bps
10 bps
310 bps
130 bps
-230 bps
-100 bps
Source: Reis, Inc
Supply was a perennial problem in the Indianapolis market, but higher
construction costs and weak property level performance have
discouraged development since 2004. As a result, supply averaged a
manageable 587 units per year from 2005 through 2007.
2,000
Moderately higher supply is anticipated in 2008 and 2009. Three
projects are tapped for 2008 delivery, including the much anticipated
Canal project Downtown.
Consumer acceptance of this 218-unit
property will have a profound impact on the Downtown redevelopment
effort. The rapidly growing Hamilton County submarket will add two
new garden projects, one each in 2008 and 2009. The strong occupancy
and rent trends observed in 2H07 in this submarket certainly bode well
for the assets.
500
Completions
Absorption
1,500
1,000
Units
•
Change
Southwest / Johnson County
SUPPLY TRENDS
•
4Q07
0
-500
-1,000
-1,500
02
COMMENT: Supply levels are generally constructive for the Indy market.
We do not share Reis’s pessimism regarding occupancy trends in the near
term, and are warming up to the metro as an attractive relative value.
03
04
05
06
07
08f
09f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
800_837_5100
Columbus, OH_Boston, MA_Bozeman, MT_Charlotte, NC_Chicago, IL_Fredericksburg, TX
Irving, TX_Jupiter, FL_Linwood, NJ_Nashville, TN_Newport Beach,CA
Reston, VA_San Diego, CA_Syracuse, NY_Voorhees, NJ
RED CAPITAL GROUP®
Market Overview
November 2007
EXECUTIVE SUMMARY
E
conomic trends were moderately stronger in the third
quarter, owing to firming
conditions in the goods producing and
hospitality industries. Year-over-year
payroll growth accelerated to a 13,200
(1.5%) pace from 11,600 (1.3%) in
2Q07. At the same time, the unemployment rate dropped 60 basis points
to 3.7%, the equal lowest rate recorded since fall 2001.
The leisure and hospitality sector
made the largest contribution to the
late-summer surge, growing at a
5,100 (5.5%) y-o-y rate, up from
3,500 jobs in 2Q07. Construction
headcounts were up 2,000 over the
comparable period of 2006, representing a 3.5% advance, while factory job
attrition declined from a 1,100 (1.1%) job rate to 200 (-0.2%).
Conversely, trade and skilled service
headcount growth was slower. Health
care services dropped from a 3,500job advance over the trailing 12
months and a 2,300-job gain in 2Q07
to a 600-job advance in 3Q07.
Weaker growth also was observed in
retail trade and business services.
A decline of the September year-overyear growth comparison to 1.1% influenced the RED CAPITAL econometric payroll model to produce a
moderately slower forecast for the
balance of 2007. The model projects
a 10,200-job advance for FY07 (down
from 11,000 in our last report), implying y-o-y growth of only 6,000 in
4Q07. For 2008, the model yields a
confidence interval of 3m to 11m jobs
and point estimate of 7,000, unchanged from our previous forecast.
Third quarter market performance
persisted on a positive trajectory.
Tenants net leased 425 units, down
from 2Q’s 624 and the comparable
periods of 2006 and 2005. But that
was enough to add 40 bps to the
metro occupancy rate. Unfortunately,
SNAP SHOT
at 91.3% occupancy remains the lowest among the RED 50, 50 bps below
joint 48th Atlanta and Ft. Worth.
Reis are of the view that the rally has
largely run its course. The service
expects supply levels to rise moderately, forestalling occupancy rate increases for the foreseeable future.
Indeed, the service expect average
occupancy to remain at the 91.3%
level through year-end 2008, before
drifting about 30 bps higher by 2011.
Asking rent growth was steady, rising
$5 (0.8%) to $655, thereby replicating
the 2Q07 advance. Concessions were
moderately higher, however, holding
effective rent growth to $4 (0.7%) to
an average of $616. Consequently,
effective rent growth expressed on a
year-over-year basis backed off from
2Q’s 7-year high 3.2% to a pedestrian
2.7%. The metric was good for 40th
spot in the RED 50, down 8 places in
the ranks quarter-over-quarter.
Reis expect sluggish rent growth to
persist through 2011. Average effective rent is projected to rise $2 in
4Q07, succeeded by a $16 (2.6%)
hike in 2008. Rent trends are expected to average 2.8% after 2009.
Properties exchanged hands at a moderate pace in the third quarter. Six
properties valued at $5mm or more
traded for a total of $100mm. The
average price per unit was $43,560.
Cap rates ranged from mid-7s to mid9s. The benchmark was the acquisition ($111,750/unit) of a luxury newbuild in Plainville by a private management company.
The RED view of the Indianapolis
market is unchanged. While expected
total returns are below average, Indy’s
low volatility produces relatively attractive risk-adjusted returns. Yield
oriented, long-term investors will find
interesting opportunities for cash flow
returns and repositioning plays.
Vacancy
(8.7% - 3Q07)
Effective
Rents
Y-o-y
change
Projected
2008
50 bps
10 bps
2.7%
2.6%
40bps
unch
13.2k
7k
($616 - 3Q07)
Cap Rate
(8.5% - 3Q07)
Employment
(916.0m - 3Q07)
KEY POINTS
•
Job growth gained momentum in 3Q07,
rising from an 11,600-job, 1.3% year-overyear pace in 2Q to a 13,200 (1.5%) job run
rate. Contrary to national norms, strength
was derived in part from goods producing
industries. Construction and manufacturing
combined to add 1,800 jobs (year-over-year),
up 2,000 from the prior quarter. Continued
growth in the hospitality/tourism sector
contributed to the quarter’s economic vigor.
•
Tenant demand moderated to a degree from
2Q07’s robust 624 unit net absorption
performance, slowing to 425. But with no
new product entering inventory, occupancy
increased another 40 basis points, bringing
the metro average to 91.3%. Nonetheless,
Indianapolis continued to rank last among
the RED 50 by this measure.
•
Effective rent hit a bump in the road. After
rising 3.2% year-over-year in 2Q07, a $4
sequential increase in the third quarter held
Indianapolis rent trends to 2.7%.
•
RED rank Indianapolis an “Opportunistic”
market that will primarily appeal to yieldoriented investors and savvy operators
interested in class-B repositioning plays.
VACANCY TRENDS
•
•
Good job creation trends combined with unsettled conditions in the
residential real estate and mortgage credit markets supported healthy
tenant demand. Owners net leased 425 units without the benefit of
new supply, thereby reducing vacancy 40 bps to 8.7%.
The thriving Hamilton County and Northwest Marion County
submarket attracted good tenant interest. Quarter-to-quarter vacancies
declined 110 and 120 bps, respectively. Vacancy in the Central
submarket increased 30 bps to 4.8% but remained the only submarket
reporting vacancy under 7%.
Source: Reis, Inc.
12%
9.2%
10%
Metro Vacancy Rate
•
8.7%
8%
6%
4%
INDIANAPOLIS
U.S.A.
2%
0%
Reis forecast absorption of nearly 400 units in 4Q, leading to a 10 bps
cut in the average vacancy rate to 8.6%. The service expect the gains
to be reversed by YE2008.
1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q
00 00 01 02 03 03 04 05 06 06 07
RENT TRENDS
•
•
•
Metro Rent Trends
Property owners started 2007 off with a bang, raising effective rents
($8 / 1.3%) in the first quarter. Sequential rent increases averaging $5
in 2Q and $4 in 3Q followed, causing over-the-year rent growth to
retreat to 2.7%. Thus, Indy slipped to 40th in the RED 50 from 32nd
place at mid-year.
Strong demand in the northwest quadrant of the metro area continued
to fuel above average rent gains. Near Northwest, Far Northwest and
Hamilton County submarkets produced sequential rent gains equal to
1.8%, 0.9% and 1.4%, respectively. The fastest growth, however, was
observed in the developing Boone / Hendricks submarket ($19 / 2.6%).
Metro average concessions expanded $1 to $39 or 6.1% of face rent.
Source: Reis, Inc.
4%
2%
2.6%
1%
0%
-1%
-2%
-3%
-4%
1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q
Reis expect rent trends to stabilize in the mid– to high-2% range.
00 00 01 02 03 03 04 05 06 06 07
nd
RANK: 40 out of 50
•
•
•
Sales velocity was consistent but not swift. Six institutional quality
trades were recorded in the third quarter. Sales totaled about $100
million, roughly 20% below the level recoded in the average quarter of
2006. Cap rates were mostly in the 7% to 9% range.
Yields in this market are among the highest in the country. Reis
estimate that the applicable cap rate index is 8.5%. Quality assets can
be acquired at initial yields of more than 7%.
The total return profile shows expected returns below the RED 50
norm. But low volatility and high initial yields are mitigating. Yield
oriented investors should find much to admire in the current market.
Source: Reis, Inc.
9.0%
8.5%
Cap Rate
•
2.7%
Asking
Effective
3%
YoY Rent Trend
•
8.0%
7.5%
7.0%
6.5%
2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
Seventies vintage class-B properties trade at $25 to $35/sf, well below
replacement cost, providing a degree of barrier protection.
05 05 05 06 06 06 06 07 07 07
Property Name
Central Park Metropolis
Beech Grove Apartments
Benchmark Apartments
Waterside at Castleton
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
BC
BC
A
28-Sep-2007
Aug-2007
Jul-2007
Sept-2007
$29.5
$ 8.5
$12.9
$16.6
$111,750
$ 31,250
$ 48,228
$ 41,525
N/A
8.4%
7.5%
8.8%
Indianapolis-Carmel, IN MSA - 3Q 2007
$240
INDIANAPOLIS
•
US
$220
Prices (000)
$200
•
$180
$160
$140
$120
•
$100
$80
03
Y
04 4Q 1Q 2Q 3Q 4Q 1Q 2Q
Y
05
06
06 06
06 07
07
Tactician Corporation published a preliminary estimate of metro
population as of July 1, 2007. The figure represents a 16,783 resident
increase over the Census’s 2006 estimate, corresponding to a 1.0%
advance. Indy added a 5-year high 26,003 (1.6%) persons in 2006.
Home price levels began to erode slightly in the fall after an extended
period of stability. HousingTracker.net report that the median home
asking price declined –1.5% from August to November, -3.6% yearover-year. The median asking price on November 7 was $134,900.
The National Association of Homebuilders ranks Indianapolis the 8th
most affordable housing market in the country. The NAHB estimate
that 86.8% of metro households could afford the median priced home.
2008 DEMOGRAPHIC OUTLOOK: Growth of approximately 1.0%
EMPLOYMENT TRENDS
Past 12 Months
•
30
Annual Chg (000)
25
20
15
10.2
10
•
7
5
0
-5
99 00
01 02 03 04 05
06 07f 08f
Indianapolis added 12,500 (1.4%) payroll jobs in the twelve months
ended in September, in line with the 1.5% U.S. average. While every
super-sector added net jobs in the period with the exception of manufacturing, the hospitality, health care, education and business services
industries made the largest contributions. Together, they added 8,900
employees, accounting for over 70% of the net regional gain.
The business services sector exhibited signs of softness in recent
months, evidencing a decline of entrepreneurial and R&D activity.
Hiring in the professional, technical and scientific services dipped to a
600-job 1.5% over-the-year pace during the first nine months of 2007,
down from 1,400 (3.4%) last year. At the same time, use of temporary workers surged, rising at a 2,300 (6.5%) annual rate through
September, suggesting a declining degree of confidence among businesses beginning in the spring.
Third Quarter 2007
•
Source: BLS
INDIANAPOLIS
USA
5%
4%
Rate
3%
2%
The pace of job creation accelerated in the third quarter, but all the
impetus came in July and August. Year-over-year comparisons in
these months were 1.7% and 1.6%, respectively, the strongest metrics
recorded in a year. But the preliminary September data were another
story. Total payrolls were up just 1.1%, the slowest metric registered
in six months. Slower hiring momentum in business and health care
services and government were the primary causes. RED believe that
an upward revision of September data is probable.
1%
Forecast
0%
•
-1%
-2%
99
00
01
02
5%
04
05
06
07
RED Estimated Generic Unlevered Asset Total Return Probabilites
15%
10%
03
RED CAPITAL Research expect 2007 job creation to fall in a range
of 9,300- to 11,200-jobs. The point estimate of our econometric
model is 10,200 (1.1%), down 800 jobs from our last installment.
Next year will be slower still, owing principally to slower GDP
growth nationally. Our forecast range falls between 3,000 and 11,000
jobs, with a most probable outcome of 7,000 (0.8%), unchanged from
our previous forecast.
INDIANAPOLIS
NASHVILLE
5.9%
4.3%
4.4%
2.0%
7.0%
6.0%
8.1%
7.7%
9.6%
9.8%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Effective Rent
Submarket
Physical Vacancy
3Q06
3Q07
Change
3Q06
3Q07
Southwest / Johnson Co.
Southeast
$565
$576
$578
$584
2.3%
1.4%
9.8%
12.0%
9.0%
12.0%
-80 bps
0 bps
West
Near Northwest Indianapolis
Far Northwest Indianapolis
East Indianapolis
Castleton
Far Northeast Indianapolis
Central Indianapolis
Boone Co. / Hendricks Co.
Hancock Co. / Shelby Co.
Hamilton County
$541
$557
$619
$517
$667
$531
$719
$700
$614
$729
$543
$581
$638
$525
$693
$537
$744
$753
$609
$760
0.4%
4.4%
3.1%
1.6%
3.9%
1.1%
3.5%
7.6%
-0.8%
4.3%
10.1%
9.2%
11.4%
8.8%
8.1%
8.0%
4.7%
5.9%
5.5%
8.8%
9.5%
8.8%
7.9%
11.7%
7.1%
9.3%
4.8%
7.2%
7.0%
7.1%
-60 bps
-40 bps
-350 bps
290 bps
-100 bps
130 bps
10 bps
130 bps
150 bps
-170 bps
$600
$616
2.7%
9.2%
8.7%
-50 bps
Indianapolis Metro
SUPPLY TRENDS
•
•
Source: Reis, Inc
In our last installment, we expressed the view that actual 2H07 supply
will likely fall short of Reis’s 480-unit forecast. Subsequently, Reis
reduced its forecast to 340 units. RED believe that a project that Reis
expect to reach completion in December (The Waverley, Central
submarket) will not be occupied before April. Therefore, supply in the
second half is unlikely to exceed 300 units.
The Cosmopolitan, a 160-unit infill project near the Canal Walk and
IU/Indianapolis is expected to enter lease up in 4Q08.
2,000
1,000
Units
•
Change
0
-1,000
Reis project a total of 732 units of completed construction in 2008.
With the Waverley moving to a 2008 completion date, the figure is
likely to be closer to 825 units. On the other hand, Reis’s forecast for
2009 (737 units) seems overly pessimistic. Because existing properties
generally sell below replacement cost, development incentives are
modest at best Expect supply of 500 units or fewer in that year.
Completions
Absorption
-2,000
02
03
04
05
06
07f
08f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
800_837_5100
Columbus, OH_Boston, MA_Bozeman, MT_Chicago, IL_Fort Worth, TX
Fredericksburg, TX_Jupiter, FL_Nashville, TN_Newport Beach,CA
Philadelphia, PA_Reston, VA_San Diego, CA
Market Overview is a publication of RED CAPTIAL GROUP. If you are interested in other metro areas we cover or would like to
RED CAPITAL GROUP®
Market Overview
September 2007
EXECUTIVE SUMMARY
S
teady performance characterized the Indianapolis economy in the second quarter.
Payroll growth preceded at a moderate 11,600-job (1.3%) pace, in line
with the national average and materially faster than regional peers. At the
same time, the rate of unemployment
drifted downward, falling to 4.0% in
July, 40 basis points from the comparable period last year. Employment
gains were primarily attributable to
expansion in the leisure and hospitality services sector, most notably in the
entertainment and tourism arena, as
well as in the retail trade, construction
and ground transportation sectors..
Leisure and hospitality services headcounts increased at a 3,500-job, 3.9%
rate in 2Q(07. About one-half of the
new jobs was attributable to food,
drink and lodging establishments.
Arts, entertainment and recreation
businesses were responsible for the
other half, evidencing an exceptionally strong season for the Capital
City’s convention, sports and tourism
sectors. Retail trade payrolls rebounded from 2006’s 600-job net
deficit to an impressive 1,500-job y-oy advance, influenced by visitor
spending and improved consumer
confidence. Hiring in other sectors
was generally slower, but continued at
a moderate, sustainable pace.
Housing market trends were no match
for Dario Franchitti’s Indy 500winning performance, but homes generally increased in value, a feat managed by few regional peers. The
NAR report that the median price in
2Q07 increased 2.4% y-o-y, comparing favorably to a –2.2% Midwest
Region decline and net depreciation
recorded in Columbus, Cincinnati,
Cleveland and Minneapolis.
Apartment market performance also
was constructive. Owners absorbed a
net of 624 units, a sound recovery
SNAP SHOT
from 1Q07’s 79 unit net move-outs
and a 249% increase from the 179 net
units leased in the comparable period
of 2006. Consequently, average occupancy increased 50 bps sequentially,
ranking 5th in the RED 50 on this
basis. But average occupancy remained at 90.9% at the end of the day,
leaving the Indy market occupying
the RED 50 cellar in this category.
Reis question whether the rally has
legs. The service expects supply
pressures to intensify and demand
momentum to dissipate in 2H07, forecasting 460 units of new supply coupled with anticipated negative net
absorption of –238 units to lead to a
60 bps decrease in average occupancy. Although Reis see demand
improving after year-end, the process
will be deliberate, leaving occupancy
below the 90.9% metric until 2010.
Vacancy
(9.1% - 2Q07)
Effective
Rents
Investors aren’t sold either, apparently, as RCA counted only $67mm
of property sales through May, second
lowest in the Midwest. Using a 6.2%
cap rate, RED estimate generic Indy
asset total returns at 7.0%, a bit below
average. But risk-adjusted returns are
compelling and we are of the mind
that the Reis forecasts are too pessimistic. We don’t discourage exposure
to well located Indy assets.
Projected
2007
50 bps
40 bps
3.2%
3.2%
40bps
unch
11.6k
11k
($612 - 2Q07)
Cap Rate
(8.5% - 2Q07)
Employment
(916.3m - 2Q07)
KEY POINTS
•
Indianapolis exhibited steady, sustainable
job creation trends in the second quarter.
Slower expansion in the skilled services
sector was offset by acceleration in
construction, retail trade and (above all)
leisure and hospitality services. Non-farm
employment was up 11,600 jobs (1.3%)
year-over-year, near the national average and
well ahead of Mideast peers. RED forecast
10,000 to 12,000 jobs in 2007, followed by a
3m to 11m confidence interval in 2008, with
point estimate of 7,000 (0.8%).
•
Tenant demand firmed in 2Q07, boosting net
absorption to a seven-quarter high 624 units.
Occupancy increased 50 basis points
sequentially, bringing the metro average to
90.9%, the highest level in five years.
•
Effective rent increased 3.2% year-overyear, the best metric posted since 4Q 1999.
•
Expected total returns from Indy assets fall
below the RED 50 average, but low
volatility produces fairly compelling riskadjusted returns. Yield-oriented investors
will find value in Indy’s lower prices per
door. “Opportunistic” total return-oriented
investors may find good relative-value too.
Following a hearty $8 (1.3%) 1Q07
hike effective rent trends came down
to earth, rising $5 (0.8%) to a $612
average in the spring. But over-theyear, rents were up 3.2%, the best
metric reported in this metro in more
than seven years: good enough for
first rank in the Mideast region and
32nd place overall in the RED 50.
Alas, Reis don’t see a long life for the
rent rally in its crystal ball either. The
service forecast a $6 2H07 advance to
$618 and a 3.2% gain for 2007. But
rent gains will be slower thereafter.
Reis expect 2008 - 11 annual effective
rent increases to average about 2.4%.
Y-o-y
change
VACANCY TRENDS
•
•
Positive job trends coupled with housing market turmoil and reduced
access to alternative mortgage products catalyzed the strongest
apartment demand observed in years. Owners absorbed a sevenquarter high 624 units in 2Q07, producing a 60 bps sequential decrease
in average vacancy. As a result, vacancy dipped to 9.1%, the lowest
metric recorded since 3Q02.
Tenant interest was particular strong in Northwest Marion County and
adjoining sections of Hamilton County. Occupancy increased 130 to
310 bps in the relevant submarkets.
Source: Reis, Inc.
12%
Metro Vacancy Rate
•
10%
9.1%
9.6%
8%
6%
4%
INDIANAPOLIS
U.S.A.
2%
0%
Reis remains skeptical of the rally. The service forecast negative
absorption and a 60 bps vacancy rate increase in the second half.
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q
2008 VACANCY RATE OUTLOOK: 20bps drop after rising to 9.7% at YE07
99 00 01 02 02 03 04 05 05 06 07
RENT TRENDS
•
•
•
Following an unusually strong up-move ($8 / 1.3%) in the seasonallysoft first quarter, owners implemented an average $5 (0.8%) effective
rent hike to an average of $612 in 2Q07. Although sequential trends
were slower, over-the-year rent growth reached a seven-year high
3.2%, good enough to rank 32nd among the RED 50.
Good tenant demand in the Near Northwest Marion and Hamilton
County submarkets produced above average effective rent trends.
Gains of 4.4% and 3.8% were recorded, respectively.
Metro average concessions were unchanged at $38, 5.8% of face rent.
Reis expect rent trends to slow dramatically after year-end 2007.
Source: Reis, Inc.
YoY Rent Trend
•
Metro Rent Trends
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
2008 RENT GROWTH RATE OUTLOOK: Decelerating to 2.4%.
Asking
Effective
2.7%
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q
99 00 01 02 02 03 04 05 05 06 07
•
Sales velocity remained at a leisurely pace in the first half. Only a
handful of trades were recorded in the spring and summer. Trade
volume was given boost, however, by the consummation of the sale of
a 740-unit class-A project in the Castleton submarket. The property
exchanged hands in June for $61.2mm or $82,703 per unit. The cap
rate was sub-6%, demonstrating a strong vote of confidence in the
recovering Indianapolis market by a major private equity firm.
Second tier properties traded at considerably higher initial yields. Cap
rates for B/A– properties generally were above 8%. One would be
hard pressed to find another top metro area where this was true.
Source: Reis, Inc.
9.0%
8.5%
Cap Rate
•
3.2%
8.0%
7.5%
7.0%
6.5%
2008 CAP RATE OUTLOOK:
2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
Stronger economic and market performance form the foundation for a potential
cap rate rally. Indy cap rate trends could outperform the U.S. metro norm.
05 05 05 06 06 06 06 07 07 07
Property Name
Broad Ripple Trails
Lakeshore
Coppertree
Waterside at Castleton (Firethorn)
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
BC
A
C
A
6-Jun-2007
20-Jun-2007
31-Jul-2007
13-Sep-2007
$12.15
$61.2
$20.5
$16.6
$37,500
$82,703
$26,554
$41,525
8.2%
5.8%
8.6%
8.8%
$240
INDIANAPOLIS
•
US
$220
Prices (000)
$200
•
$180
$160
$140
$120
$100
•
$80
03
Y
04 4Q 1Q 2Q 3Q 4Q 1Q 2Q
Y
05
06
06 06
06 07
07
2008 DEMOGRAPHIC OUTLOOK: Moderately slower growth
•
Annual Chg (000)
25
20
11
10
7
•
5
0
-5
01 02 03 04 05
06 07f 08f
•
Source: BLS
INDIANAPOLIS
USA
4%
The business and professional services were a major growth engine
during the past decade but hiring dropped in the 12-month period
ended in August. Sector payrolls increased only 1,300 jobs, less than
one-half of the average of the past four calendar years.
The pace of job creation accelerated moderately in the second quarter
following six months of below trend growth. Indianapolis payrolls
expanded at a 11,600-job, 1.3% rate, up from 1.2% in 1Q07 and 1.1%
in 4Q06. Faster hiring in the retail trade and leisure services sectors
was primarily responsible, reflecting a successful summer of public
events and conventions that drove higher visitor spending.
Forecast
3%
Rate
Indianapolis added 12,600 (1.4%) payroll jobs in the twelve months
ended in August, among the best performances observed in the
Mideast and Midwest Regions. The Health care, education and leisure services industries made the largest contributions, creating 1,400,
1,200 and 3,600 new jobs, respectively. Trucking and warehousing
companies hired liberally, while the metro’s healthy demographic
trends propelled construction, retail trade and government growth.
Second Quarter 2007
5%
The OFHEO index fell -0.31% in 2Q07, ranking 181st among the 287
metro areas included in the agency’s house price index.
Past 12 Months
30
99 00
Home prices were steady. According to the Metropolitan Indianapolis
Board of Realtors, the median price of a home sold during the first
eight months of 2007 was unchanged from the same period of 2006.
Sales volume fell 8.1%, but sales pending increased 13.1%, suggesting
the development of a moderate degree of forward momentum.
EMPLOYMENT TRENDS
15
In 2006, Indianapolis attracted the largest number of domestic inmigrants in five years and the second largest number in the Census
Bureau’s 17-year data series. Population surged, as a result, rising
26,003 (1.6%), the largest one-year gain since 2001.
•
2%
1%
0%
-1%
-2%
99
00
01
02
03
04
05
06
RED CAPITAL Research expect 2007 job creation to fall in a range
of 10,000- to 12,000-jobs for the fourth consecutive year. The point
estimate of our econometric model is 11,000 (1.2%). Next year will
be slower though. Decelerating national commerce will exert pressure
on the transportation and warehouse industry, and construction spending will stagnate Metro payroll growth will slip to the 3,000- to
11,000- job level, with most probable result of 7,000 (0.8%)
07
2008 EMPLOYMENT GROWTH RATE OUTLOOK: Slower but positive.
15%
10%
5%
INDIANAPOLIS
NASHVILLE
5.9%
4.3%
4.4%
2.0%
7.0%
6.0%
8.1%
7.7%
9.6%
9.8%
0%
90%
70%
50%
30%
10%
RED CAPTIAL Research
SUBMARKET TRENDS
Effective Rent
Submarket
2Q06
2Q07
Physical Vacancy
Change
2Q06
$556
$569
2.3%
10.2%
9.5%
-70 bps
Southeast
$572
$588
2.8%
10.8%
10.7%
-10 bps
West
Near Northwest Indianapolis
Far Northwest Indianapolis
East Indianapolis
Castleton
Far Northeast Indianapolis
Central Indianapolis
Boone Co. /Hendricks Co.
Hancock Co. / Shelby Co.
Hamilton County
$537
$547
$618
$520
$658
$522
$713
$696
$602
$723
$549
$571
$633
$521
$688
$537
$732
$734
$613
$750
2.2%
4.4%
2.4%
0.1%
4.5%
2.8%
2.6%
5.5%
1.8%
3.8%
10.5%
10.3%
12.1%
8.2%
8.4%
8.3%
5.1%
6.2%
6.0%
9.6%
10.0%
8.2%
9.0%
9.5%
8.0%
10.9%
4.5%
8.0%
6.2%
8.3%
-50 bps
-210 bps
-310 bps
130 bps
-40 bps
260 bps
-60 bps
180 bps
20 bps
-130 bps
$593
$612
3.2%
9.6%
9.1%
-50 bps
SUPPLY TRENDS
•
Source: Reis, Inc
Expected 2H07 supply will be readily digestible in number. Officially,
Reis project delivery of 480 units but the actual figure is likely to be
fewer than 300.
About 100 units will be added to the small Boone / Hendricks
submarket in 2H07. Historically, market conditions in this submarket
have been strong, although completion of 260 units in 1H07 produced
a material rise in submarket vacancy rate.
2,000
Completions
Absorption
1,000
Units
•
Change
Southwest / Johnson
Indianapolis Metro
•
2Q07
Much of the remaining supply is bound for the Southwest Johnson.
Submarket. The inventory is large and the supply will consist of a
second phase of an existing, well-occupied property.
0
-1,000
-2,000
2008 SUPPLY TREND OUTLOOK:
Supply will remain below 1,000 units per year through 2011. New product is
well dispersed geographically, avoiding potential over-concentration in a few
submarkets.
02
03
04
05
06
07f
08f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
800_837_5100
Columbus, OH_Boston, MA_Bozeman, MT_Chicago, IL_Fort Worth, TX
RED CAPITAL GROUP®
Market Overview
June 2007
EXECUTIVE SUMMARY
J
ob creation accelerated to a
12,800 (1.4%) pace in 2006,
up from 10,200 (1.2%) in the
previous year. Rapid hiring among
education and health service providers
contributed to the up-tick. Supersector employment increased 100
(0.1%) in 2005 and 3,800 (3.6%) in
2006. Strong job growth caused the
unemployment rate to tumble 40 basis
points to 4.4%, the lowest ratio since
2001.
Payroll expansion slowed to 10,400
year-over-year in 1Q07, following a
14,800 job gain in the previous quarter. The deceleration was attributable
to slower hiring among professional
and business service establishments.
Sector growth cooled from a monthly
average of 3,100 in 2006 and 2,800 in
4Q06 to 1,500 in 1Q07. Sluggish
business service growth was partially
offset by faster hiring among retailers.
After losing 1,400 jobs y-o-y in 4Q06,
sector headcounts increased by 900.
RED expect moderately slower job
growth in 2007 and 2008. Our econometric model generates point estimates of 10,000 jobs in 2007 and
9,000 in 2008. The 2007 and 2008
confidence intervals range from 7,000
(0.8%) to 13,000 (1.4%) and 4,000
(0.4%) to 14,000 (1.5%), respectively.
By way of comparison, Economy.com
projects job growth of 1.6% per annum in 2007 and 2008.
The 1Q07 occupancy rate fell 40 basis
points sequentially to 90.3%, ranking
last among the RED 50. The decrease was attributable to robust supply and negative tenant demand. According to Reis, 344 units were delivered in 1Q07 and a net of 71 units
were vacated. Weakness in the Castleton and Hamilton County submarkets was largely responsible, where
negative net absorption of 163 units
and 89 units, respectively, was observed.
Reis expect improving market conditions through the remainder of 2007
and 2008. The service forecasts absorption to outpace demand 1,209
units to 1,136, over the forecast period, resulting in a 20 bps increase in
occupancy to 90.5%.
Effective rents increased 3.1% y-o-y
in 1Q07, from $589 to $607. Asking
rents grew at a moderately slower
2.5% rate to $645. The value of the
average concession package fell to
5.9% of asking rent from 6.4% in
1Q06. Reis forecast year-over-year
effective rent growth of 2.8% in 2007
and 2.3% in 2008.
Five properties priced at $5 million or
more traded in 1Q07, yielding $53.9
million in sales. The largest trade
involved a 314-unit “Class A” community in the West submarket. The
property fetched a price of $17.6 million or $56,051 per unit. The applicable cap rate was 5.4%.
Real Capital Analytics identify 26
investor grade trades in 2006, totaling
$527 million in volume. Velocity
rose to 29 trades but volume fell to
$508.8 million in the 12-month period
ended in March. The average price
fell 12.1% to $51,896 per unit.
We estimate probable returns on generic metro assets of 6.7%, ranking
10th lowest among the RED 50. But
below average historic volatility gives
rise to average risk-adjusted returns.
Effective rent growth of 3.1% in
1Q07 was above expectations, leading
RED to assign an “Opportunistic”
ranking for metro assets. This indicates that while market fundamentals
do not warrant an active buying program, there may be attractively priced
assets located in above average submarkets that provide stable and sufficient cash-flow yields. Furthermore,
current momentum may allow rent
growth to exceed Reis forecasts.
SNAP SHOT
Vacancy
(9.7% - 1Q07)
Effective
Rents
Y-o-y
change
Projected
2007
10bps
10bps
3.1%
2.8%
n/a
n/a
10.4k
10k
($607 - 1Q07)
Cap Rate
(n/a - 1Q07)
Employment
(892.5k - 1Q07)
KEY POINTS
•
The metro vacancy rate increased 40 basis
points sequentially to 9.7%. The metric was
down 10 basis points year-over-year.
•
and 3.1% year-over-year, respectively. The
value of the average concession package fell
from 6.4% of asking rent to 5.9%.
•
The 1Q07 median single-family home price
was $112,500, a 0.9% decrease year-overyear.
•
According to RCA, cap rates averaged 7.2%
in the twelve months ended in March. A
review of transaction data reveals that ‘Class
A’ properties generally traded in the 5.0% to
6.0% range.
•
RED forecast payroll growth of 10,000
(1.1%) in 2007 and 9,000 (1.0%) in 2008.
VACANCY TRENDS
•
•
The metro vacancy rate increased 40 basis points sequentially to 9.7%.
The increase is attributable to the delivery of 344 units and negative net
absorption of 71 units. No condo conversion or reversion activity was
recorded.
Vacancy fell 10 basis points year-over-year owing to strong tenant
demand, particularly in 3Q06. Absorption totaled 1,002 units in the
twelve-month period and 619 units in the third quarter alone.
Reis expect modest improvement in the remainder of 2007, resulting in
a 10 basis point decrease in vacancy. The service anticipates similar
conditions in 2008 and a commensurate 10 basis point decrease in
vacancy to 9.5%.
Source: Reis, Inc.
12%
Metro Vacancy Rate
•
9.8%
10%
8%
6%
4%
Indianapolis
U.S.A.
2%
0%
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
2008 VACANCY RATE OUTLOOK: Small Decrease
00
01 01
RENT TRENDS
•
•
05
06 07
Asking rents registered a 2.5% year-over-year advance to $645. The
value of the average concession package fell from 6.4% of asking rent
in 1Q06 to 5.9%.
Reis expect slower effective rent growth throughout the remainder of
the year, culminating in a 4Q07 average rent of $616. The service
forecasts year-over-year effective rent growth of 2.3% in 2008.
3.1%
Asking
Effective
3%
2%
1%
2.5%
0%
-1%
-2%
-3%
-4%
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
According to Real Capital Analytics, sales volume fell from a trailing12 month total of $527 million in December to $509 million in March.
The average price fell 12.1% to $51,896 per unit.
Reis did not report a cap rate index or any 1Q07 sales activity in
Indianapolis.
01
02
03
04
04
05
06
07
Source: Reis, Inc.
8.3%
8.2%
Cap Rate
Loopnet recorded five 1Q07 transactions involving properties priced at
$5 million or more, totaling $53.9 million in proceeds. One trade
involved the sale of a former tax credit development that reached the
end of the compliance period and converted to market-rate. The
property sold for $5.5 million or $45,082 per unit. The estimated cap
rate was 7.2%.
01
•
04
4%
00
•
03 04
Source: Reis, Inc.
Effective rents increased 1.3% sequentially, nearly matching the 2006
annual gain (1.5%). The average effective rent was up 3.1% year-overyear to $607, the largest increase since 1Q00.
2008 RENT GROWTH RATE OUTLOOK: Decreasing
•
02
Metro Rent Trends
YoY Rent Trend
•
9.7%
8.1%
8.0%
7.9%
7.8%
7.7%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
05 05 05 05 06 06 06 06 07
2008 CAP RATE OUTLOOK: Stable
Property Name
Stonybrook Commons
Chesapeake Landing
Willows at Castleton
Island Club
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
B
BC
BC
A
February 2007
February 2007
March 2007
March 2007
$5.5
$14.0
$11.7
$17.6
$45,082
$29,787
$53,259
$56,051
7.2%
10.6%
5.6%
5.4%
$240
MSA
•
US
Prices (000)
$220
•
$200
$180
•
$160
$140
•
$120
$100
03
04
Y
Y
3Q 4Q 1Q 2Q 3Q 4Q 1Q
05 05
06
06 06
06
2008 DEMOGRAPHIC OUTLOOK: Stable
•
Annual Chg (000)
25
20
10
•
•
0
-5
04 05 06 07f 08f
•
•
Source: BLS
5%
4%
Rate
•
2%
1%
•
0%
-1%
-2%
00
01
02
5%
04
05
Reduced hiring among business service establishments was partially
responsible for the slowdown. Headcounts increased 3,100 in 2006
and 1,500 in 1Q07. Conversely, temporary staffing firms added 2,100
more employees (2,900) in 1Q07 than the 2006 average.
1Q07 brought an end to job attrition among retailers as 900 net new
hires were added, representing a 2,200 job swing from 4Q06.
Job growth continued to accelerate among education and health service providers. Employment increased 4,600 year-over-year in 1Q07
and 3,800 in 2006.
06
07
RED forecast 2007 job growth between 7,000 (0.8%) and 13,000
(1.4%), with a point estimate of 10,000 jobs.
RED expect 2008 payroll growth of 9,000 (1.0%), with a confidence
band of 4,000 (0.4%) to 14,000 (1.5%).
2008 EMPLOYMENT GROWTH RATE OUTLOOK: Small Decrease
15%
10%
03
The pace of payroll growth slowed to 10,400 (1.2%) in 1Q07 and
11,500 (1.3%) in April.
Forecast
Indianapolis
USA
99
In 2006, job growth accelerated to 12,800 (1.4%) from 10,200 (1.2%)
in the prior year. Faster job creation in the education and health super-sector was responsible. Firms hired a net of 100 (0.1%) employees in 2005 and 3,800 (3.6%) in 2006.
First Quarter 2007
9
5
3%
Indianapolis registered a 2.3% gain in the OFHEO home price index,
ranking 194th out of 285 metros.
Past 12 Months
30
99 00 01 02 03
The 1Q07 median single-family home price was $112,500, down 0.9%
year-over-year.
EMPLOYMENT TRENDS
10
The Indianapolis homeownership rate increased 190 basis points in
2006 to 79.0%.
07
15
The metro population increased 1.6% in 2006, up from 1.4% growth in
2005. The acceleration is attributable to a 46% increase in net
domestic migration.
Indianapolis
5.4%
3.9%
Cleveland
6.8%
5.5%
6.6%
7.8%
7.7%
8.7%
9.3%
10.1%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Effective Rent
Submarket
Physical Vacancy
1Q06
1Q07
Change
1Q06
1Q07
Southwest / Johnson
Southeast
West
Near Northwest
Far Northwest
East
Castleton
Far Northeast
Central
Boone / Hendricks
Hancock / Shelby
Hamilton County
$554
$572
$529
$536
$608
$518
$654
$526
$712
$695
$601
$713
$571
$584
$547
$558
$625
$514
$671
$539
$731
$717
$609
$750
3.0%
2.1%
3.4%
4.1%
2.8%
-0.7%
2.7%
2.4%
2.6%
3.2%
1.3%
5.2%
10.5%
11.6%
10.4%
10.8%
11.6%
8.9%
8.8%
8.7%
5.4%
6.9%
6.4%
9.8%
10.9%
13.1%
10.4%
8.6%
9.8%
9.1%
8.7%
8.5%
4.0%
8.6%
6.8%
9.6%
40 bps
150 bps
unch
-220 bps
-180 bps
20 bps
-10 bps
-20 bps
-140 bps
170 bps
40 bps
-20 bps
Metro
$589
$607
3.1%
9.8%
9.7%
-10 bps
SUPPLY TRENDS
•
•
Source: Reis, Inc
Completions totaled 710 units in 2006, up from 579 units in the
previous year. Net condo reversion activity added an additional 51
units to apartment inventory.
In 1Q07 developers delivered 334 units, the largest single quarter total
since 4Q04. Reis expect the completion of another 540 units in the
remainder of 2007 and 596 units in 2008.
According to Reis, there is one condo project consisting of 92 units that
is currently under construction. The source identifies eleven additional
condo projects, containing a total of 1,112 units, that had not yet
broken ground as of 1Q07.
2,000
Completions
Absorption
1,500
1,000
500
Units
•
Change
0
-500
-1,000
-1,500
2008 SUPPLY TREND OUTLOOK: Stable
02
03
04
05
06
07f
08f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
800_837_5100
Columbus, OH_Boston, MA_Bozeman, MT_Fort Worth, TX
RED CAPITAL GROUP®
Market Overview
March 2007
EXECUTIVE SUMMARY
E
verything seems to be coming
Indianapolis’s way. In February, the NFL Colts earned the
city a first sports world championship,
and in March the Bureau of Labor
Statistics discovered 9,100 payroll
jobs that it previously overlooked,
raising the 2006 metro jobs estimate
from a lackluster 4,100 to a robust
12,800 (1.4%). The sources of the
unanticipated gains were diverse: 9 of
12 industry super-sectors recorded
upward revisions, four of 2,000 jobs or
more. The foregoing included construction (2,900), business services
(3,300), health care and education
services (3,000) and leisure and hospitality (2,500). The data also show that
the pace of hiring accelerated in the
4Q. Year-over-year, Circle City produced 14,800 (1.7%) jobs, largely due
to rapid growth in the health care and
education sector, where payrolls expanded at a 6.0% annual pace.
By way of forecast, RED CAPITAL
expect 2007 job creation to develop in
a range of 5,000 - 14,000, with point
estimate of 10,000. For 2008, the
econometric model produces a slower
forecast range with midpoint of 8,000.
The apartment market produced a
steady performance in the seasonally
slow 4Q06, suffering a 10 basis point
occupancy rate retreat to 90.7%. Although Indy ranked 59th in the RED
63 on the basis of its headline occupancy rate, the metro recorded 8thand 14th-place finishes with respect to
year-over-year (-50 bps) and sequential occupancy rate change, improving
from 47th and 51st one year earlier.
Absorption was positive for the fourth
consecutive quarter. A net of 125
units were leased, capping a year in
which owners tenanted 962 units, representing the best 12-month leasing
period since 2000. Supply of 194
units was recorded, however, offsetting absorption gains and producing
the 4Q06 occupancy rate decline.
Effective rents decreased $1 (-0.2%)
sequentially to $599, but gained $9
(1.5%) y-o-y. With respect to rent
growth, Indy ranked 49th in the RED
50. Asking rents averaged $638, up
$4 (0.9%) y-o-y. The typical concession offer consumed 6.1% of gross
rent, 17h highest in the RED 50.
Reis forecast continued sluggish effective rent growth through 2009. Annual increases are projected to range
from 1.7% to 2.0%, rates approximately 200 bps below the U.S. metro
average. Net revenue gains are expected to improve to approximately
3% in 2010, converging with the projected 3.3% national metro average.
After a slow 2005, property trade was
brisk last year. Real Capital Analytics
reported 26 asset sales for proceeds of
$527mm, up from 21 trades for
$299mm in 2005. Second half activity
was moderately slower than the first,
with sales of 14 trades recorded for
$228 million total proceeds.
Investors moved down the quality
spectrum in 2H06, focusing largely on
older assets with repositioning potential. Average price/unit decreased to
$47,464 from $72,567 in IH06. By
the same token, cap rates plummeted.
Cap rates averaged about 7.0%, down
from an RCA estimate of 8.7% in
1H06. Further compression was observed in early-2007 trades. Cap rates
were observed in the mid–5% range.
RED expect 6.6% 10-year total returns from generic Indy assets, about
100 bps below the U.S. average.
That’s not high enough to justify an
active buying program, despite Indy’s
low historical volatility levels. Our
principal thematic concern remains
the challenge posed by the readily
affordable for-sale housing sector that
shackles potential rent growth. With
this in mind, we assign a “hold” rating, subject to revision should job or
rent trends exceed our expectations.
SNAP SHOT
Y-o-y
change
Vacancy
(9.3% - 4Q06)
Effective
Rents
Projected
2007
60 bps
10 bps
1.5%
1.7%
30bps
30 bps
($599 - 4Q06)
Cap Rate
(8.2% - 4Q06)
Employment
(913.2k - 4Q06)
14.8k
10k
KEY POINTS
•
•
•
•
BLS payroll revisions turned our perception
of the Indianapolis economy upside down.
Thanks to unexpectedly strong growth in the
health care, business services and hospitality
industries, the metro added 12,800 (1.4%)
jobs in 2006, delivering one of best
performances in the region.
While hiring accelerated in 4Q06, the RED
CAPITAL econometric model casts doubt
on the longevity of this above-trend
expansion. The model produces forecast
ranges of 5,000 to 14,000 payroll jobs in
2007, and 3,000 to 14,000 in 2008.
The apartment market stabilized and owners
reported positive absorption in four
consecutive quarters. Supply trends
moderated, allowing owners to achieve a 60bps gain in average occupancy to 90.7%.
Soft markets and withering competition from
the affordable for-sale housing segment kept
a tight lid on rents. Owners extracted only a
$9 (1.5%) y-o-y effective rent hike to $599.
Investors re-discovered Indianapolis after a
lengthy hiatus Sales volume rose and cap
rates were materially lower in recent trades.
VACANCY TRENDS
•
•
Indianapolis owners experienced a seasonal occupancy rate decrease in
4Q06, falling only 10 basis points from 90.8% to 90.7%. This
compared favorably to a 30 bps decline in 4Q05 and a 40 bps 4Q06
U.S. metro average performance.
Metro properties net leased 125 units in the fourth quarter, representing
the fourth consecutive quarter of positive absorption. This was the first
instance in which owners achieved net occupied inventory in each
quarter of a calendar year since 2000.
Source: Reis, Inc.
12%
Metro Vacancy Rate
•
10%
9.9%
6%
4%
INDIANAPOLIS
U.S.A.
2%
Reis expect a leisurely journey back to market equilibrium. Although
supply promises to be constructive, the service projects occupancy
consistently below 92% through 2011.
0%
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q
2008 VACANCY RATE OUTLOOK: Slow Improvement
00
01
RENT TRENDS
•
•
•
The amortized value of the typical rent concession package increased
$1 to $39. This represented 6.1% of gross rent revenue, ranking
Indianapolis 34th lowest in the RED 50 in this category.
Owners implemented effective rent hikes averaging $9 (1.5%) during
calendar 2006. In this regard Indianapolis ranked 57th among the RED
63. Metro performance in 4Q05 (1.2%), earned 51st place.
4%
•
04
05
06
06
1%
0.9%
0%
-1%
-2%
-3%
Reis expect slow rent growth through 2009, ranging from 1.7% to
2.0% per year. Faster growth is expected in 2010 and 2011.
-4%
4Q 3Q 2Q 1Q 4Q 3Q
2Q 1Q 4Q
00
05
RCA report an average price per unit of $59,017 in 2006, up 38% from
2005. The average price/unit in 12 1H06 trades was $72,467, third
highest of the nine Midwest metros covered by that service.
01
02
03
03
04
06
06
Source: Reis, Inc.
8.5%
Investor demand for metro properties increased considerably in 2006.
Sales proceeds totaled $527 million, including $228 million in 2H06,
according to Real Capital Analytics.
RCA estimate the average cap rate for 2006 was 7.5%. Reis report a
higher figure, placing the typical property yield at about 8.2% in 4Q.
1.5%
2%
Cap Rate
•
03
Asking
Effective
3%
•
03
Source: Reis, Inc.
Metro effective rents decreased $1 to $599 in 4Q06, the equivalent of a
0.2% retreat. Asking rents were unchanged sequentially at $638.
2008 RENT GROWTH RATE OUTLOOK: Slow improvement
•
02
Metro Rent Trends
YoY Rent Trend
•
9.3%
8%
8.0%
7.5%
7.0%
2008 CAP RATE OUTLOOK:
Cap rates applicable to 1Q07 trades suggest that investors are actively pursuing
Indianapolis assets. Estimated cap rates were in the mid-5% range. The trend
bodes well for further cap rate compression this year..
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
05
05
05
05
06
06
06
06
Property Name
Chesapeake Landing
Willows at Castleton
Island Club
AMLI at Riverbend
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
BC
BC
A
A
22-Feb-2007
1-Mar-2007
6-Mar-2007
2-Nov-2006
$14.0mm
$11.7mm
$17.6mm
$66.5mm
$29,787
$53,259
$56,051
$66,767
10.6%
5.6%
5.4%
6.6%
$250
INDY
•
US
Prices (000)
$225
•
$200
$175
$150
•
•
$125
$100
04
05
Y
Y
3Q 4Q 1Q 2Q 3Q 4Q
05
05
06
06
06
06
•
Population in the eleven-county Indianapolis MSA increased 29,189 in
2006, according to estimates recently released by the Census Bureau.
The 1.5% advance was the strongest registered since 2000.
.Supply pressures continue to keep a tight lid on metro home prices.
The median price of a home sold in 2006 was $119,300, representing a
$4,500 (-3.6%) decrease from 2005.
The typical Indy home
appreciated 2.1% since 2001, when the median was $116,900.
About 78% of metro households can afford the median priced home.
Lower permitting of single- and multifamily homes suggests that
supply relief is in store: good news for the multifamily market.
2008 DEMOGRAPHIC OUTLOOK:
Strong economic performance provides the foundation for another year of above
average population growth
EMPLOYMENT TRENDS
Past 12 Months
•
30
Annual Chg (000)
25
20
15
10
10
8
5
0
-5
99 00 01 02 03
04 05 06 07f 08f
4%
•
Job growth in nine super-sectors was upwardly revised. Substantial
gains were recorded in professional services, especially health care
and management companies. Accommodations, food service and
construction payrolls also received considerably upward payroll revision.
The unemployment rate declined from the 2005-monthly average of
4.9% to 4.5% in 2006. Unemployment fell to a five-year low of 4.1%
in November, but rebounded to 4.8% in January, up 10 bps y-o-y.
Year-to-Date
•
Source: BLS
INDIANAPOLIS
USA
5%
•
3%
Rate
•
The BLS rebenchmarking exercise uncovered a substantial hidden
cache of payroll jobs in Indianapolis MSA. Rather than the 4,100
jobs previously reported, the Circle City generated 12,400 payroll
positions, the best performance since 2000. The 1.4% advance was
one of the fastest rates observed in the Midwest.
2%
1%
Preliminary payroll estimates for January were in line with 4Q06
results. Total payroll employment was up 13,900 (1.6%) year-overyear.
Emerging weakness in construction and non-durable goods manufacturing was offset by rebounding retail trade and information sector
employment.
Forecast
0%
•
-1%
-2%
99
00
01
02
5%
04
05
06
07
15%
10%
03
Influenced by National City Bank economist Dr. Richard DeKaser’s
forecast for moderating GDP, exports, residential construction and
consumption, the RED CAPITAL econometric payroll forecasting
model generates payroll job confidence intervals of 8,000 to 14,000
for 2007 and 3,000 to 14,000 for 2008. Point estimates are 10,000
and 8,000 jobs, respectively. RED CAPITAL Research does not
have a logical bias in regard to this metro.
Indianapolis
3.9%
5.0%
Chicago
5.5%
6.7%
6.6%
7.8%
7.7%
8.9%
9.3%
10.4%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Effective Rent
Physical Vacancy
Submarket
Southwest/Johnson
Southeast
West
Near Northwest
Far Northwest
East
Castleton
Far Northeast
Central
Boone/Hendricks
Hancock/Shelby
Hamilton County
Metro
4Q05
4Q06
Change
4Q05
4Q06
$550
$566
$532
$541
$612
$525
$659
$516
$723
$690
$601
$726
$562
$579
$540
$556
$616
$513
$658
$528
$720
$705
$613
$744
2.2%
2.3%
1.5%
2.8%
0.7%
-2.3%
-0.2%
2.3%
-0.4%
2.2%
2.0%
2.5%
10.0%
11.4%
10.3%
10.7%
12.4%
10.0%
9.2%
8.5%
5.2%
6.2%
7.3%
9.9%
9.1%
12.5%
11.2%
8.9%
10.6%
10.0%
7.5%
8.8%
4.4%
5.5%
6.3%
8.7%
-90 bps
110 bps
90 bps
-180 bps
-180 bps
0 bps
-170 bps
30 bps
-80 bps
-70 bps
-100 bps
-120 bps
$590
$599
1.5%
9.9%
9.3%
-60 bps
SUPPLY TRENDS
•
•
Source: Reis, Inc
Developers delivered 518 units of new apartment supply in 2006, down
from 575 units in 2005. Indeed, the 2006 vintage was the smallest in
the sixteen-year Reis Indianapolis data series. Supply averaged 1,500
units per year from 1990 to 2005.
Reis expect 764 units to be completed in 2007. The service project
average supply of 769 units for the three-year period ended in 2009.
Pipeline supply is widely dispersed, mostly in rim suburban
communities. 2006 deliveries are pending for Plainfield in Hendricks
County (264 units) and Greenwood in Johnson County (96 units).
Also, 164 units are on tap for Georgia Street near Conseco Field
Downtown. The project will enter lease up in late 2007 or early 2008.
2,000
1,000
Units
•
Change
0
-1,000
Completions
-2,000
2008 SUPPLY TREND OUTLOOK:
The supply outlook is constructive for owners, providing an opportunity to
backfill existing vacant inventory and firm up rent trends.
02
03
04
05
Absorption
06
07f
08f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
800_837_5100
Columbus, OH_Boston, MA_Bozeman, MT_Fort Worth, TX

Indianapolis, Indiana

Transcription

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