The recent and projected new supply of apartments have also trended in the right direction recently. Supply has been tempered and is predicted to remain low over the next three to five years as developers face higher construction costs. The projected annual supply over the near term is around the 500-unit mark, a significant drop from previous years.
With the waning new supply and positive job growth, Indianapolis rents and occupancies have begun to move upwards in 2007. Overall rents have increased nearly 2 percent from a year ago, and effective rents are up nearly 2.5 percent as concessions continue to burn off. Communities reporting concessions continue to decrease, with just over 50 percent reporting the use of concessions this year as occupancies rise and traffic increases throughout the metro.
Market and effective rents are projected to continue to make gains with meaningful increases of 2.5 percent to 3 percent projected over the next three to five years. Occupancies, which have been stagnant the past few years, have started to tighten and now stand at a 91.1 percent average, compared to a 90.2 percent rate at the same time last year. Although sharp occupancy or rent increases are unlikely, occupancies should inch toward 92 percent in the next year.
SUBPRIME REFUGEES Like so many U.S. markets, Indianapolis has a wave of tenants seeking apartments following a recent foreclosure on their homes. As subprime and other lending woes headline local and national papers, the effects of increased mortgage loan delinquencies and foreclosures will continue to affect rental community owners in Indy.
Nearly 2 million adjustable-rate mortgages nationwide are projected to reset over the next 18 months, many with subprime borrowers. In 2006, Indiana had the sixth-highest number of foreclosures in the country, which has had ramifications at different levels in each of its submarkets. Property managers have reported seeing prospective tenants fleeing foreclosures on a daily to weekly basis. As a result, managers are in the midst of reviewing and changing their qualification procedures to accommodate this influx of new prospects. Many of these prospective tenants still hold steady employment and do not have other negative marks on their credit scores besides the foreclosure, giving them a unique set of metrics to consider.
Overall, the subprime and prime lending markets will have a positive effect on apartment owners’ rent rolls in the near term. On the one hand are foreclosure tenants coming back to apartment rentals, but there are also current apartment residents who had been contemplating a first home purchase and are now more hesitant to do so due to the upheaval in the single-family markets.
GREEN LIGHT With so many positive trends, investors—both local and national—have pushed into the market or continued to expand their presence here. What was once a market with only a handful of mainly local buyers is now attracting out-of-state buyers looking at price-per-unit and price-per-square-foot values significantly lower than their East and West Coast counterparts.
These buyers, such as Empire American Holdings in New Jersey, have been aggressively purchasing properties in the market, including the recently sold nine-property Gibraltar portfolio, which included five Class A communities. Additionally, Empire purchased the Lexford division of Equity Residential in 2006. This portfolio included several Indiana properties and more than 27,000 units in total.
The Indianapolis market has lost some of its institutional ownership among REITs, such as the aforementioned Equity Residential. AMLI (now part of Morgan Stanley) sold its portfolio in 2006, and AIMCO has reduced its portfolio, too. These former REIT-owned properties have been snapped up by large national and local private players, with the former continually seeking small to large portfolios of properties or top-class single communities in specific submarkets. This trend of national firms buying apartments in Indianapolis and other similarly sized markets will continue as these firms continue to diversify their growing portfolios and seek less expensive complexes with relatively less competition than they see in the larger core markets.
Truly, the time is now for Indianapolis.
FAST FACTS Considering Indianapolis? Here’s what you need to know:
- Population: 1.7 million
- Occupancy: 91.1 percent (as of June 2007)
- Median Age: 34.6 years
- Median Household Income: $59,414
- Average Rent: $650 (as of June 2007)
Unemployment: 4.3 percent (as of June 2007) NOTABLE: Each Memorial Day Weekend, the city hosts the Indianapolis 500, known worldwide as the “Greatest Spectacle in Racing.” The inaugural race was in 1911. Dario Franchitti, actress Ashley Judd’s husband, won the 2007 race.
Sean P. Fogarty is director of Holliday Fenoglio Fowler in Chicago.