Housing is a bust, but apartments are booming

Near the corner of Brambleton Avenue and Duke Street in Norfolk, workers pour concrete and ratchet metal frames into place as a multistory apartment complex with 239 units takes shape.

Belmont at Freemason, scheduled to open this summer, is being built by Kotarides Developers, which is betting on pent-up demand for new apartments in Norfolk.

"In the last 10 years, Norfolk has not had a lot of new apartments delivered," said Pete A. Kotarides, a partner with the Virginia Beach-based firm. "Most of the apartment stock is 20, 30 or 40 years old."

But Kotarides isn't the only developer who saw opportunity in Norfolk and elsewhere in Hampton Roads. Within three miles of the Belmont at Freemason, nearly 500 more apartments are being built. Across Hampton Roads, developers are constructing nearly 1,700 apartment units, with an additional 2,000 planned.

While home building and sales continue to fall across Hampton Roads, apartment construction is booming. Many of the projects were planned several years ago, when apartment vacancy rates in Hampton Roads hovered around all-time lows of less than 3 percent. But as rental units flood the market in coming months, real estate experts and economists say rent prices could fall as supply outpaces demand.

"It's a very simple equation," said Vinod B. Agarwal, an economist at Old Dominion University. "The supply is increasing, and demand is not increasing at the same rate. Something has to give, and that something is rents."

Prices already have started to drop.

So-called "same-store rents," or the price of rent for apartments in buildings that have been around for a year or longer, fell 0.8 percent, to $871, in Hampton Roads for the six-month period that ended in October, according to Real Data, a Charlotte, N.C.-based apartment research firm.

It's the first time the research firm has recorded a drop in Hampton Roads' rents since it began tracking the data in 1997.

Meanwhile, Real Data found that the apartment vacancy rate in Hampton Roads during the same six-month period last year rose to 6.9 percent, its highest level in more than a decade.

And the growing supply of apartments probably will be exacerbated by the region's slowing job growth.

"The locomotive that pulls the apartment train is jobs," said Dan W. Johnson, a senior vice president at real estate firm CB Richard Ellis. "There's no question that if you review the announcements of jobs, there's going to be a little slumping of demand."

New jobs encourage the creation of households. As that growth slows, economists say the demand for all types of housing slows as individuals who might have gotten their own apartment opt to get a roommate or move back in with their parents.

After expanding 1.4 percent in 2008, civilian employment in Hampton Roads will grow 0.2 percent, or by about 1,600 jobs, economists at Old Dominion University say.

"All of those things in a recession environment can hurt us and make vacancies go up," said T. Richard Litton Jr., president of Norfolk-based real estate investment firm Harbor Group International, which manages some apartment complexes.

Another growing problem for landlords is the rising number of unsold houses and condos being pulled off the market and rented to would-be apartment occupants. Known as the "shadow market," these are not tracked by Real Data but usually grow as home sales slow.

The number of homes listed as rentals has gone up nearly 11 percent in the past year, according to Real Estate Information Network Inc., the local multiple listing service. There are currently 1,881 homes listed as rentals, up from 1,701 a year ago.

"What all of this is starting to say is, the flexibility of landlords being able to jack up rents is gone," Agarwal said.

Nearly one-half of the apartments under construction in Hampton Roads are in Norfolk.

In addition to the Belmont's 239 units, there are 225 units under construction at Roseland Property Co.'s 201 Twenty One, a mile north at 21st Street and Llewellyn Avenue.

An additional mile and a half up Llewellyn in Riverview, S.L. Nusbaum Realty Co. is months away from completing its 194-unit River House complex on a stretch of land beside the Lafayette River.

Nusbaum also plans to build 175 units at the Wachovia Center office complex, now rising downtown.

The city's concentration of apartment projects is driven in part by its vacancy rate, which at 5.3 percent is one of the region's lowest.

But the number of units on the way worry some.

"Any time there's a lot of new product on the market, it's got to get absorbed," Johnson said. "There are a lot of apartments coming up in Norfolk. It's a little concerning."

As new complexes open, vacancy rates in the city are expected to rise.

Wendell C. Franklin, the Nusbaum senior vice president heading the River House project, said he expects downward pressure on rents across the region as the economy weakens.

"I think we're going to be in a holding pattern," he said.

Franklin said landlords can't raise rents when vacancies are high because it might encourage tenants to seek out a better deal. It is hard, he said, to predict how long apartment demand in the region will be soft.

"We've never been in this economy before," he said. "There's no information you can go back and look at. It's a whole new ballgame."

The rising supply of new apartments also could force landlords of older buildings to reduce rents to keep tenants, Kotarides said. They'll also tout value and location to attract new ones, he said.

"They aren't constrained to charging certain rents in the same way that new developers of new products are," he said.

Rents at Kotarides' new Belmont complex will start at around $1,300 for a one-bedroom apartment.

Kotarides said he thinks his project, right beside the Norfolk YMCA and the light rail also under construction, could lure residents from other cities in the region who want to live closer to their jobs.

"Norfolk, obviously, has a large portion of the jobs in the area, a lot of the economic drivers in the region," he said.

Chesapeake is the next city facing a slew of new apartment openings.

With Hampton Roads' lowest vacancy rate at 5.2 percent, the city has more than 800 units planned for delivery by next year, according to Real Data.

Kotarides plans a 300-unit project, called Belmont at Providence, near the intersection of Military Highway and Providence Road in Virginia Beach, a location Real Data considers part of the Chesapeake apartment market.

Other projects planned for the Chesapeake apartment market include Wood Partners' 280-unit Streets of Greenbrier complex near Greenbrier Mall and a 226-unit complex called Cascades at Woods Corner by Bonaventure Realty Group.

Despite the number of apartments being developed and the softening demand, developers and investors continue to turn to apartments. Many see it as a smart investment in a weak economy.

Harbor Group, for example, added to its apartment portfolio in October when it purchased two Hampton Roads complexes for a total of $69.2 million. The two locations - Mariner's Cove in Virginia Beach and Steeplechase Apartments in Williamsburg - have nearly 700 units between them.

Litton, Harbor Group's president, said the investments made sense at the time, as homeowners struggled to get financing for or didn't want to buy a home during a slumping economy.

"Apartments still are seen as the best defensive investment in these times," Litton said. "People still have to have a place to live."

Josh Brown, (757) 446-2318, josh.brown@pilotonline.com