Higher Yields Offer Opportunities for Investors in Louisville
Job growth is supporting apartment demand in Louisville and driving a surge in construction. Significant job creation in August placed overall employment in Louisville above the pre-recession high. The sector recording the largest gains year over year was leisure and hospitality with the addition nearly 4,000 workers. Job growth in this sector bodes well for apartment owners as many people employed in local hotels and restaurants typically rent. Demand for rentals has kept occupancy hovering near the normal turnover rate of 95 percent for the past 10 quarters, allowing operators to impose higher rents. The rise in demand is also moving construction projects forward. Developers have 22 projects underway, which will boost apartment inventory by 4.5 percent through 2015. Many of the new complexes are located along major transit corridors in the east or southeast portion of the metro. In the southeast, Amazon.com is expanding with the recent signing of a 600,000-square foot lease near Shepardsville, where the Reserves of Thomas Glen recently opened with 192 units.
Strong apartment operations have attracted investors to rental properties in the Louisville metro. Included are many new private buyers from gateway markets who are seeking higher yields than are available in many coastal communities. The influx has pushed demand for Class A and Class B properties with more than 100 units far above supply at cap rates in the mid-6 to mid-7 percent range. As a result, some investors are developing their own projects, while others are seeking smaller properties or searching farther from the metro core. Another option is to move down the quality scale, where initial yields for lower-tier assets typically begin in the 8 percent range. In the year ahead, more owners are likely to take notice of a window of opportunity to sell while buyer interest is piqued and ahead of a further rise in the cost of borrowing. Owners are also facing slower rent growth as the surge in inventory stiffens competition for renters in the coming quarters, providing another incentive to list.