Multifamily Sector Better; Market Not Fully Healthy (Opinion)

The focus of this article is the multifamily sector of the real estate market in Benton and Washington counties.

Streetsmart NWA researched more than 26,000 multi-family units in the two-county area in Q1 2011.

The markets examined were Bentonville/Centerton, Rogers/Lowell, and Siloam Springs in Benton County, and Fayetteville and Springdale in Washington County.

Each area, with the exception of Siloam Springs, was broken down into submarkets. Siloam Springs was considered as one overall market due to representing less than 3 percent of the total units surveyed.

The market with the largest number of units surveyed was Fayetteville, representing slightly more than 45 percent of the total.  This is not unexpected considering demand created by the University of Arkansas.

The breakdown in units surveyed between Benton County and Washington County was 34 percent and 66 percent, respectively.  One- and two-bedroom units comprised almost 92 percent, overall, of the total units surveyed.

In Q1 2011, the overall vacancy rate in the multifamily sector in Benton and Washington counties, based on our research, was slightly more than 11 percent. This reflected significant improvement from Q4 2010.

It appears the multifamily vacancy rate peaked in the two-county area at almost 15 percent in Q3 2009. The vacancy rate has gradually declined from this peak to the present level.

The vacancy rate decline is due to several factors. First, there has been limited new supply of product added over the last few years.  Second, foreclosures in the single-family sector have resulted in increased demand for existing multi-family rental units.

Third, stricter mortgage lending requirements have made it more difficult for potential buyers to enter the single-family sector.

Fourth, there is, and has been, a gradual decline nationwide in homeownership. This trend is projected by economists to continue. 

Each of these factors has had a positive effect on absorption of vacant units at existing multi-family projects.

With respect to the individual markets researched in Benton and Washington counties in Q1 2011, the overall vacancy rates varied from a low of slightly less than 8 percent in Bentonville to a high of slightly more than 13 percent in Fayetteville.

Each of the markets researched in Benton County reflected a vacancy rate of less than 10 percent.

There is clear improvement in demand in the multifamily sector in Northwest Arkansas; however, overall occupancy is still not at a level that constitutes a healthy market.

Real estate research publications indicate a national vacancy rate in the multifamily sector in the 7 percent to 8 percent range.

Benton County is approaching this level; however, Washington County still has a ways to go. We must be careful not to view the improvement in demand as a sign that substantial new product supply is needed.

It seems that in all property sectors, when vacancy is near or below 10 percent, developers consider this a signal that new projects are needed. While some new developments may be needed, we tend to overbuild – driving vacancy up – and then begin the long absorption period to once again establish a healthy market level.

The decline in the multifamily vacancy rate in the two-county area has had a positive effect on one- and two-bedroom monthly rental rates.

From the high vacancy level in Q3 2009, to the most recent Q1 2011 research, one-bedroom rates increased 6.4 percent while two-bedroom rates increased 2.6 percent. This gradual upward trend in monthly rental rates is expected to continue as vacancy rates slowly decline.

The multifamily sector in Benton and Washington counties is rebounding from the recent recession better than the other property categories. Projections indicate this trend will continue.  w

Tom Reed is a partner in Streetsmart NWA, which produces reports pertaining to the residential, multi-family, and commercial sectors of the real estate market.

Company offices are located at 2804 Main Drive, Suite C, Fayetteville, Arkansas. The phone number is (479) 575-9100.