Bad news for prospective homeowners is good news for multifamily investors in the Rhode Island submarkets.
Home to just over one million residents per 2016 U.S. Census Bureau data, Rhode Island is a small state facing some of the same market dynamics as booming metropolitan markets such as Boston and New York. While single family home sales rose for the fifth consecutive year in 2017, with a 6 percent increase in median prices, there remains a big lack of inventory particularly in the starter home market.
The Rhode Island housing market is characterized by a lack of affordability and demand outpacing supply. A 2016 HousingWorks study commissioned by Rhode Island Housing found that 3,500 new housing units per year would be needed to meet demand through 2025. Further, the study found that 81-percent of demand was for multifamily housing, and, with growing senior and Millennial populations, maintaining affordability is key.
Home to the tenth highest real estate taxes in the U.S., and with the median sales price of single family homes climbing in response to what the Rhode Island Association of Realtors calls “historically low inventory,” single family homeownership is a not attainable for many residents, which drives further demand for rental units. In Rhode Island, home costs are 4.1 times higher than median income, while it is only 3.6 times higher nationally.
However, while demand for affordable multifamily housing is good news for investors who seek to maintain strong occupancy rates and rent growth, supply remains limited. This situation is being compounded by low levels of new multifamily construction, with Rhode Island issuing the lowest number of multifamily building permits in the U.S. in 2017. And, sales and median prices of multifamily homes increased by 15 percent in 2017. While the market is competitive, there remains opportunity for Class-B and Class-C investors to buy vacant retail and office properties and repurpose them, when zoning permits, for multifamily living.
For context, 10 million new tenant households were created during the past decade in the U.S. And, some experts even predict that Rhode Island’s housing crisis will soon rival New York and Boston, which favor wealthy buyers.
The outlook for retail fundamentals may not be as bright as for the multifamily sector.
A 2017 report by Bloomberg shows Rhode Island experienced a 7.1-percent decline in retail employment during the past decade. According to the R.I. Department of Labor and Training (DLT), retail employment in Rhode Island peaked in 2003 with 53,200 jobs. Retail employment rates, however, began falling before the 2008 recession and were never restored to their peak level.
Following the closure of the Warwick Mall, and rising vacancy rates at other brick-and-mortar retail venues, some Rhode Island malls began clamoring to regain relevance and draw visitors by welcoming fitness facilities as tenants. The Rhode Island Mall recently welcomed a Planet Fitness, while Providence Place mall will soon welcome a CycleBar while SouthCoast Marketplace searches for its own fitness tenant.
The Rhode Island Office Market
Similar to other markets where office vacancies have risen in recent years in response to fundamental shifts in the way people work – think coworking and work-from-home scenarios – adaptive reuse has helped to bring new life to vacant buildings in Providence. Last September, Bisnow reported that many abandoned Class-B office spaces in Downtown Providence had been converted into multifamily housing. Seeking to lure new businesses into the state and fill vacancies, a new tax incentive plan was passed in 2017. Further, plans are on the table to bring new life to the iconic “Superman Building”, the city’s tallest tower, which has been vacant since 2013.
The Economic outlook favors investors in Class B & C “workforce” multifamily housing.
Data released by the Department of Labor and Training shows Rhode Island’s overall jobless rate was 4.5 percent, 0.4 percent above the national average for January 2018. While declines in manufacturing and retail employment persist, the data shows construction jobs were up by 600 in January 2018, over January 2017. This data follows reports of modest growth in the state’s private sector during 2017.
Economist Michael Lynch, of consulting firm IHS Markit, predicts that Rhode Island’s labor force and population will only grow on average 0.1-percent annually over the next 10 years. Further the state’s payrolls are only expected to grow 0.4-percent annually through 2022.
Rhode Island also faces income inequality. Providence was recently ranked third by The Brookings Institution for the highest income inequality rates among residents, coming in behind Washington D.C. and Atlanta.
Similar to other markets, real estate investors can benefit from the knowledge of an experienced investment sales advisor with rich local submarket expertise. Northeast Private Client Group actively supports private investors looking to buy, sell or exchange mid-market properties including mixed-use, multifamily, retail and office assets. We would welcome the opportunity to learn more about your investment real estate needs.