Downtown Durham is in the middle of an apartment building boom.
By the end of 2018, more than 1,300 apartment units are expected to open in the city’s center, giving the area a total of 2,891 apartments, according to Downtown Durham Inc.
It’s enough apartments that analysts are predicting that rents in the downtown area, which have been quickly rising in recent years, could begin to stabilize.
In Durham Central Park, the new Liberty Warehouse apartments opened this year, and the Mark at Durham One on South Roxboro Street is almost done.
On West Main Street, the Howerton-Bryan Funeral Home has just been demolished to make way for nearly 200 apartment units, and plans submitted in May show that the former Crown Park Hotel on Willard Street could be transformed into a 340-unit apartment complex.
The growth is being fueled by an ascendent economy in the Triangle drawing more and more people to the area.
“Downtown is really Durham’s growth story,” said Cameron McIntosh, an analyst for RealPage, a real estate data company. “The whole region has been a case of a rising tide carrying Raleigh and Durham, but there has been a drastic shift in development attention (downtown).”
“The demand has really followed the supply there, and the demand is tied to economic growth that is coming from predominantly health care and biotech – but, also, the tech sector is really starting to take a hold in Durham.”
And that increase in construction is likely to continue, McIntosh believes, as Durham is a few years behind Raleigh in terms of the multifamily construction cycle.
“Raleigh’s supply really started to peak coming into 2017,” he said. “I see Durham’s construction staying strong till the end of 2018 and softening in the end of 2019. It has good economics and good demographics.”
Rent in downtown has been on a steep, upward trajectory.
Over the past year alone, rent in downtown Durham has increased 11.2 percent from the second quarter of 2016 to the second quarter of 2017, growing from $1,121 per month on average to $1,246 per month, according to RealPage.
That compares to a 3.8 percent increase over the same time period for the entire city, with an average rent of $1,083 in the second quarter of 2017.
So who can afford to rent downtown?
The N.C. Housing Coalition and other experts recommend spending no more than 30 percent of your household income on housing. To afford $1,246 rent, a household would need to make $41,533 a year.
But vacancy rates have also begun to rise in downtown Durham, according to Emily Bostic, an analyst with the Raleigh branch of the real estate services firm Colliers International, a result of a number of new units being added and apartments changing ownership.
The vacancy rate, or the percentage of empty apartments, helps predict future trends in rents.
A Colliers report from the first quarter of 2017 found the vacancy rate in downtown Durham was 19.9 percent – the highest of any of the submarkets it tracks in the Triangle.
That high rate was likely due to the timing of the 246-unit Liberty Warehouse apartments opening at the end of the first quarter with many units still available.
A RealPage report for the second quarter, however, placed the vacancy rate at a still-high 10.5 percent.
That suggests rent increases downtown should start to slow.
“In this market, I think there is enough demand to keep (rent prices) up,” Bostic said. “I think (rents) will moderate, but I don’t see rents decreasing.”
McIntosh of RealPage agrees, and his firm estimates that the double-digit growth over the past year will likely slow to the single digits going forward.
“Looking out we expect to see pretty solid demand and pretty aggressive supply for Durham’s standards,” he said of the more than 1,300 units expected to open in the next year.
“I see substantial demand that will support that supply … (and) rents will be moderating a bit because it’s a market that hasn’t seen supply and now it’s starting to see supply.”
At a 10 percent vacancy rate, concessions – discounts offered by apartments – begin increasing, said Engle Addington, an analyst with Charlotte-based AptIndex.
“A really good occupancy rate is 95 percent or more. Anywhere from a 5 percent to 10 percent vacancy rate is OK but not great,” she said. “If you go above 10 percent and closer to 15 percent that is not good. 20 percent is bad.”
Addington added that it usually takes a new property or a property under new ownership 18 to 24 months to get to an occupancy rate of 95 percent.
“If they are at 10 percent they are going to be offering at least one month free,” she said. “If they are at 95 percent they might offer you $200.”
An example in Durham can bee seen at Bell West End, which opened on West Chapel Hill Street in 2014. Bell Partners purchased the apartment last year for nearly $55 million.
Bell West End – where one-bedroom studios start out at $1,064 per month – is currently offering two months free rent on new leases. Efforts to reach Bell for comment were unsuccessful.
The occupancy is really low there because it was originally aimed at Duke University students, and when Bell bought the building they wanted to make it a more traditional apartment building, Bostic explained.
“You had a bunch of students moving out in the fall, so you had all those students leaving the building and that affected the vacancy rate for the building,” she said.
Bostic predicts that concession rates and the vacancy rate will taper toward the end of the year for Bell and the rest of downtown.
One reason rents are likely to keep rising is due to an expected wave of newcomers.
The Durham metropolitan statistical area has seen the third-quickest growth of any North Carolina metropolitan area this decade, growing by 10.9 percent since 2010.
The N.C. Office of State Budget and Management forecasts that Durham County will add 67,152 people by 2030, growing to 373,364 people.
“There is a crazy amount of people moving here on a daily basis, and they want to be in central locations,” Bostic said. “I don’t see the demand going away anytime soon.”