Investors continue to find viable opportunities to invest in Class-B and Class-C assets in Greater New Haven which offer the opportunity to make capital improvements, raise asking rents and generate higher returns. This year Northeast Private Client Group has closed a number of high-profile transactions in the New Haven submarket, including the sale of the iconic “Exchange Place” at 123-127 Church Street for $6,388,000 on March 29; the sale of 245 Whitney Avenue for $2,310,000 on April 12; and the sale of 101 Orange Street for $2,131,500 on May 10.
In fact, despite softening fundamentals in Class-A multifamily in primary locations, the values of Class-B and Class-C assets in secondary markets such as New Haven continue to perform well. Properties within a 5-mile radius of New Haven’s downtown have among the highest occupancy rates in the country and demonstrated continued rent growth through Q2 of 2017
Multifamily properties – or vacant office buildings with the potential for conversion to multifamily – that are in close proximity to Yale University remain among the most desirable assets, with investors buying undervalued properties and repositioning them to increase rents while still maintaining strong occupancy rates in a desirable area.
While New Haven offers many opportunities for value-added Class-B and Class-C investors who have been priced out of other markets, such as nearby New York City, the Class-A market is becoming soft due to an influx of units coming to market. According to our sources at CoStar, a thinning construction pipeline coupled with a relatively high concentration of renters should help protect fundamentals in the coming years. The New Haven metro has long benefited from a relatively large and stable pool of renters, with high demand partially generated by the lower-than-average wages and high cost of living, which create a pool of renters by necessity.
Nearly 20-percent of New Haven multifamily stock is located within a mile and a half of Yale University. Within this radius, average rents are about $2.05/SF, or roughly $0.50/SF higher than the rest of the metro submarket. Even as apartment construction surged nationally over the past year, New Haven continued to deliver modest amounts of new supply. Of that supply, more than 80-percent of new multifamily construction is Class-A product, driving down Class-A rent growth for the near future.
After New Haven area rents increased by more than 2-percent in 2015, rent growth has slowed in recent quarters, with rent gains in 2016 coming in below both the historical and cyclical averages. That said, rent growth in Class-B and Class-C properties was last year’s strongest, at 2-percent, while rents in Class-A assets fell by more than 2-percent. So, why are Class-B and Class-C multifamily units still good investments?
Homeownership, which peaked at over 69-percent in 2005, reached an all-time low of 63.4-percent in 2015. With a net of two million new rental households, it is not surprising that multifamily sales then hit a new high of $120 billion. And, while homeownership rates began to rise again in the second half of 2016, the demand for workforce-level housing near public transportation remains strong.
The neighboring Greater Bridgeport submarket, despite having one of the largest populations in the metro, hasn’t had the multifamily building boom that hit many areas in the New York submarkets in the last few years. Historically an industrial and manufacturing hub, Bridgeport doesn’t generate the high-income finance and professional-service jobs that define much of the surrounding submarkets. The result is a dearth of Class-A luxury construction.
That said, the Bridgeport submarket has been a boom town for owners of Class-B and Class-C multifamily throughout this cycle. Bridgeport’s economy is largely reliant on low-to-middle-income blue-collar industrial and manufacturing jobs and apartment rents are among the lowest in the area. Rent growth has been strong since 2011, ranking in the top third of all New England metros. In 2015, rent growth was more than double both the metro rate and the submarket’s historical annual growth rate, and this trend continued in 2016, with rents growing 3-percent, again ranking Bridgeport’s rent growth in the top third of New England metros.
Among Northeast PCG’s recent sales in the Bridgeport market are 35 Kings Highway East, a 9,000-square-foot mixed use retail and office building that sold for $1.1 million and 335 Benham Avenue, a 28-unit multifamily that sold for $1.9 million.
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