The city of Albuquerque recently landed a coup with news that Netflix has committed to a major expansion in the city – a move that is expected to pump $2 billion into the local economy over the next decade. That deal is icing on the cake on an economic growth story that is fueling strong investor demand for multifamily assets.
As other metros stumbled during COVID-19, the Albuquerque multifamily market has outperformed in occupancy levels, rent collections and rent growth throughout 2020. According to the latest NorthMarq research report, vacancies improved to 3.3% in third quarter, which is the lowest level since 2015. On average, rent collections during the pandemic have dropped by a slight 1-2% versus the 5-20% declines seen in other major cities. The low vacancies have given landlords greater pricing power. Metro-wide rents climbed 4.3% in third quarter with a few submarkets that have seen rent growth rise by as much as 5.5%.
Although Albuquerque has not been immune to job losses caused by the pandemic, losses are likely to be far less severe than what has occurred nationally. Total employment in the local market was expected to contract by less than 1 percent, or approximately 2,500 net job losses during 2020.
The multifamily outlook remains favorable thanks in part to a relatively modest supply pipeline. Although developers were expected to deliver 1,000 new units in 2020, completions had previously been averaging 500 new units per year since 2015. A decline in new permits issued in 2020 suggests a slower year of construction ahead. However, Class B assets are being renovated up to B+/A- levels to take advantage of rising rents. As the Class B stock (properties built between 1980 to mid-2000) continues to improve, the tenants that cannot afford the higher rents are being squeezed into older units in less desirable assets/areas.
Strong market fundamentals have buoyed investor interest, which in turn is putting pressure on pricing and cap rates. As of third quarter, cap rates averaged 5.5 percent with a median price per unit at $97,700. It also is interesting to note that current owners are keeping their foot on the gas in terms of acquisitions. In the past, new to market money has always paid the highest price, but now existing owners are willing to duke it out and bid top dollar for assets.
LIHTC deals in particular are in high demand. Two recent sales attracted nearly two dozen bidders combined. One asset sold at a sub 5% cap rate, while the other at a cap rate of 5.25%.
Investors also like the longer term growth story that is unfolding in the region. In addition to the Netflix expansion at its ABQ Studios, Amazon is moving forward with plans to build a 2 million-square-foot fulfillment center that will bring even more job opportunities. Although Netflix and Amazon are definitely names that get noticed, there are positive stories occurring across the city’s key industries, including tech, aerospace and biosciences. Those sectors, along with stable government and education jobs, have helped Albuquerque weather the negative economic effects of the pandemic and position the metro for more growth ahead in 2021 and beyond.