Tenants are lining up for a crop of new high-priced Downtown apartments. But will the current rental boom fare better than the recent condo bust?
After seven years living on Manhattan's Upper West Side followed by a stint in the resort town of Telluride, Colo., Melisa Greenberg was craving a lifestyle in between the two when she returned to Ohio. The Dayton native gave New Albany a try. But living beyond the outerbelt soon left the 41-year-old Mercedes-Benz of Easton sales consultant feeling estranged from her social circle.
"My friends always joked that you needed a passport to get out to New Albany," says Greenberg from the living room of her townhouse in Lifestyle Communities' Annex at River South. She didn't expect to enjoy downtown living again after Manhattan, but with her favorite restaurants Milestone 229, Sidebar 122 and De-Novo Bistro & Bar within walking distance and the Scioto Mile just beyond her front door, Greenberg is hooked on Columbus.
"It's safe. You can take a walk at night, walk over to the swings and watch the river. I don't feel afraid, and there's a million restaurants within walking distance," says Greenberg, who loves having friends over for dinner on one of her two rooftop terraces.
Greenberg is one of a growing number of young professionals, recent college graduates and empty nesters rushing to sign leases in the city's newest upscale apartment developments.
The building boom is evident in Columbus's central business district and surrounding neighborhoods. Rental communities are springing up in new territory such as Columbus Commons as well as established communities-the Arena and Brewery districts, the Short North and Grandview Heights. Some lucky developers have rented all their units before the doors even open.
This latest wave of residential development reflects the goals of the city's downtown development plan, outlined more than a decade ago by Mayor Michael Coleman. "One of the first goals of our administration 13 years ago was to transform our Downtown into a residential neighborhood," says Coleman in an email interview. "We were determined to change the notion of Downtown as a business district to which people arrived at 8 a.m. and fled at 5 p.m."
Columbus's once-bustling urban core, which boasted 30,000 residents in 1951, had by 2000 withered to a commuter town with a population of only 3,488. Coleman's ambitious 2002 Strategic Business Plan called for 10,000 new housing units to be built or adapted for reuse by 2012. The city's development department, along with Capitol South Community Urban Redevelopment Corp. and the Columbus Downtown Development Corp., enacted development-friendly property tax abatements, capital improvements to streets and sidewalks and housing loan funding. (According to the city's website, to date more than 5,000 apartments and condos have been built or are in development.)
By the time the 2010 Downtown Columbus Strategic Plan was released, the population had grown to 5,500-the first increase in six decades. "This transformation has been slow and difficult, but it has taken place before our very eyes," says Coleman.
Developers initially embraced owner-occupied properties as the hot ticket to meeting Coleman's housing goals. From 2002 to 2006, 777 condominium units had been sold, 209 were in contract, an estimated 550 were under construction and more were in the permitting stages, according to a 2007 report by the Danter Co. commissioned by Capitol South/CDDC. Unfortunately, that boom came not long before the collapse of the housing market. Financing tightened, and a supply-heavy Downtown condo market was hobbled.
"The financial market collapse is, in my opinion, what really ended up hitting the condo market the way it did. And that's really been to the benefit of the apartment market since," says Brett Kaufman, founder and CEO of Kaufman Development. Kaufman's 174-unit 600 Goodale apartment community preleased more than a quarter of its units ahead of its May opening at rents ranging from $875 to $3,295.
"We are bullish on Downtown and believe that, for the right product in the right location, the market will continue to support more housing," says Kaufman, who started his company in 2011 after working in multifamily development at Schottenstein Real Estate Group and previously at Huntington National Bank and Banc One Capital Partners.
In 2013, luxury apartments have supplanted condos as the development du jour. Local developers and real estate professionals say that this time around, by shifting the focus from ownership to rentals and mixed-used, the prospects for long-term success are brighter.
From Boom to Bust, and Back Again
The success of the high-end rental market is a welcome rebound from Downtown's high-profile condo flops. The 11-story Ibiza development in the Short North, for example, left presale condo buyers in a lurch when developer Apex Realty Enterprises defaulted on a $4.8 million loan. Apex planned to convert the condos to apartments, and then convert them back again when the market rebounded. Buyers who had already lined up (at price tags of $159,999 to $1.5 million) balked. Apex filed for Chapter 11 bankruptcy protection in 2011, and multiple buyers sued to recover their deposits.
Another large-scale condo townhouse and loft project, Joseph Recchie's $200 million Jeffrey Place in Italian Village, was abandoned after the developer's financial shortfall.
Both failed developments sat idle until recently. Wagenbrenner Development Inc. announced plans last year to redevelop Jeffrey Place as Jeffrey Park-an upscale apartment and condo community-by 2014. The $180 million project will bring 261 apartments, according to The Columbus Dispatch, with rents ranging from $1,100 to $1,650.
Elford Development Ltd. and Wagenbrenner partnered to redevelop the Ibiza site as the Hub, an upscale mixed-use retail and apartment community. "We expect to start renting in the fall, October of 2014," says Mike Fitzpatrick, president of Elford Development. Fitzpatrick says pricing has yet to be finalized for the Hub's 72 apartments. But like most of the new projects in and around Downtown, the Hub's target market is affluent young professionals and empty nesters.
Fitzpatrick speculates banks' tighter mortgage guidelines have helped feed the current apartment boom. "I think it is much more difficult to get financing to purchase condos today than it was before the recession. I think both before and after, there's been strong demand for quality Downtown housing" for renters, he says.
In addition to the Hub, Elford is redeveloping the former Fireproof Records building on the corner of North High Street and Second Avenue into a community of 58 apartments. Preleasing has also begun on Wagenbrenner's 108-unit Harrison Park apartments in the Harrison West neighborhood.
Younger tenants want Downtown's cultural and social perks paired with the economic mobility of renting; they also want luxury design extras, Fitzpatrick says. "Today, a lot of the new Downtown housing is being built to the quality standards of the condos that were being constructed a few years ago."
Lifestyle Communities' Annex at River South is putting the finishing touches on phase two of the Scioto Riverfront development. Its 213 units rent for $900 to $2,225. In addition to riverfront access and skyline views, amenities include granite countertops, hardwood floors, rooftop terraces and private garages.
Thanks in part to civic improvements such as the Scioto Mile, Columbus Commons and the increase in walkable entertainment, restaurant and retail districts, there's been a "noticeable shift" in demand for Downtown rental housing, says Lifestyle Communities President Brent Miller in an email interview. "With apartments in high demand across the board, Downtown properties are able to command slightly high rents given the recent draw to the area," Miller says.
The Downtown/university submarket is ripe for developers, with rent growth and vacancy rates that top suburban areas. CBRE Inc.'s fourth quarter 2012 market outlook report shows the Downtown/university district has a 16.9 percent share of the wider Columbus market's 134,535 rental units. Those 22,672 apartments have a vacancy rate of just 0.9 percent, lower than any suburb. Average Downtown/university rents average $893.30 per month, the second-highest in the metro area behind the Dublin/Hilliard submarket's $915.38.
"There really wasn't much of a market for apartment housing if you go back … five, 10 years ago. And now it's incredibly strong and incredibly popular," says Ed Joseph, vice president of investment properties in CBRE's multi-housing properties group. "There's construction going on, it's mostly high-end, and they're getting rents that, five years ago, were probably unimaginable for Columbus."
Joseph blames the tough lending market for the condo stall, while crediting city government, businesses and civic organizations for attracting recent graduates, young professionals and empty nesters to rent Downtown or on the city's near outskirts. Developers and real estate professionals say capital improvements, low crime rates and thriving culture, dining and nightlife are driving the rental market. Conversely, the increase in residents further improves the quality of lifestyle Downtown.
"Residents demand a higher level of city support, special improvement district support, and at the same time they populate the streets … during off-hours, which makes a big impact on how Downtown feels," says Cleve Ricksecker, executive director of the Capital Crossroads and Discovery special improvement districts. The independent civic associations represent roughly 800 commercial, institutional and residential property owners in central Columbus neighborhoods.
DowntownColumbus.com showcases the SIDs' efforts to eliminate disincentives to Downtown living-namely the grime and disorder that often plague metropolitan neighborhoods. When Coleman launched his assault on urban decay in 2002, members of the Capital Crossroads and Discovery SIDs were surprised to see condos under development Downtown. Most immature urban residential markets see more rental units brought online than condos, says Ricksecker.
Though condo sales haven't gone away completely, Ricksecker says developers are now leaping almost exclusively into rental properties. "The question is, how much can Downtown absorb at any one time, and there's some concern about that. But I think, in the larger sense, it's almost impossible to bring too much product online down here."
Given an appropriate housing supply, Ricksecker says the national standard for any downtown residential population is for 1 percent to 2 percent of the metro population to live in the central business district and surrounding neighborhoods. In Columbus, that would equate to 18,000 to 36,000 people, compared with a current core Downtown population he estimates at roughly 6,300.
According to 2010 U.S. Census figures, the population in the Downtown vicinity and surrounding neighborhoods (bounded roughly by Interstate 70 to the south, I-71 to the east, Fifth Avenue to the north and state Route 315 to the west) was about 14,100. So there's still ample room for growth.
Historically low interest rates (around 4 percent) combined with the ability to charge higher rents offsets the construction costs associated with mid- and high-rise builds, making new development in the Downtown vicinity more attractive than suburban construction or buying and renovating existing buildings.
Jerry Hall, a certified commercial investment member and senior vice president of multifamily development for NAI Ohio Equities, credits these market forces for drawing Atlanta-based Carter to build Highpoint at Columbus Commons, a 301-unit community with rents ranging from $850 to $2,765.
"Columbus was one of the top markets for rent growth in the last five years. They saw about 5 percent per year, which is the highest in the Midwest," says Hall. "The question is, is that going to continue?"
To some extent, continued progress on the city's residential goals depends on economic factors that, as the condo slowdown showed, are largely beyond developers' control. Continued economic improvement, a healthy lending environment and the job market all will affect the city's ability to absorb the thousands of apartment units currently under construction and planned in the next year or two.
Multifamily construction permitting reached the fourth-highest point in nearly a decade in 2012, a sign of steady future development. According to the Columbus Department of Building and Zoning Services, the 3,139 units issued permits in 2012 represent 20.9 percent of the total units proposed since 2004-the highest number of units proposed in the past decade. The valuation also reached a nine-year high in 2012, at $233.8 million. Since 2004, multifamily construction in the metro area has totaled $1.01 billion. (The department tracks permits citywide only, not by neighborhood.)
As development continues, investors will be watching for signs that the Downtown apartment market is growing oversaturated. "There just has to be a fine balance between absorption and supply," says Hall. "When your vacancies start to increase, you know you've reached that saturation point."
Based on current units rented and preleasing figures, the market still has room to grow. Nationwide Realty Investors reports occupancy rates of 95 percent for its 252 Arena Crossing apartments, 99 percent for the 226-unit Flats on Vine (completed in 2010) and 99 percent for the 154 Apartments at the Yard development, completed this year. NRI will begin preleasing the 120-unit Flats II in mid-May.
For the time being, rental supply is catching up with pent-up demand, and developers expect the condo market will reach its fighting weight again soon as well. "There was a large shortage of housing in downtown Columbus, and it's been that way for many years," says Kaufman. "That's why I think you're seeing the success that you're seeing now from the for-rent side. … I think people will want to own Downtown as well as rent Downtown in the near future."
Until then, renters can sample the condo lifestyle without the commitment (or the lending requirements), provided they get in on the ground floor of a hot development. Upscale rents usually come with community amenities as well, from standards such as on-site fitness centers and communal greenspace to lifestyle activities. 600 Goodale, for example, offers wellness activities and has established a partnership with the Community Shelter Board that allows residents to participate in community charity events.
The Downtown retail market has been showing signs of growth in response to the growing population. Earlier this year, specialty grocer the Hills Market opened a Grant Avenue location. Pockets of retail have sprung up on Gay Street and in other areas. To encourage such development, the mayor's Mile on High incentive program aims to bring retailers back to the central business district through a combination of grants, loans and tax abatements.
As the revitalization continues, the Capital Crossroads and Discovery SIDs will keep pace, says Ricksecker. Maintaining quality of life will be key to keep the growth moving forward. "Any crowded urban environment can become disorderly if you don't pay daily attention to details and maintain that environment. That is our main focus, honestly."
Kitty McConnell is a reporter for Columbus CEO.