2011oct outlook-apartment with economy

8/3/2019 2011Oct Outlook-Apartment With Economy

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Apartments undeterred by slower economicgrowth, post universal gains in net absorption.The apartment sector is benetting from theconvergence of several macro demand trendsenergizing rental markets across the country. Thesector largely powered through the summerseconomic pause as net absorption recordedstrong gains in the third quarter. Leasing activitydid lose some pace from the second quarter,but given the weakness of the labor market andthe uncertainty wrought by anemic GDP andcrises on both domestic and international fronts,the sector secured enough traction to drivelower vacancy and solid rent growth. Tightsupply conditions will continue to bolster apartment performance, similar to other property sectors,but apartments are thriving from profound shifts in demographic, economic and social patterns.

The sector will move into the third year of positive momentum as sweeping improvementsin apartment operations tighten vacancy across the country. Third-quarter apartment vacancymeasured 5.6 percent, representing a 30-basis-point decline from the second quarter and measuring150 basis points lower than one year ago. Net absorption totaled over 37,000 units in the thirdquarter and, while still strong, marks a signicant deceleration from 91,000 units recorded forthe same period last year. The apartment sector has moved away from the cyclical surge indemand that accompanies recovery to a more moderate sustainable expansion. Operations retaina favorable bias as net absorption totaled nearly 122,000 units, outpacing the 26,000 new unitsadded to inventory year to date through 2011. Asking and effective rents of $1,048 and $975, postedannualized gains of 2.1 and 2.4 percent, respectively, with asking rents discounted by about 7 percent.

Foreclosures, subpar home sales volume, value declines, and a sharp reduction in creditavailability catalyzed an abrupt reversal in homeownership patterns. By some estimates, lendershave foreclosed on more than three million homes since 2009. The federal government established amoratorium on foreclosures until lenders regained control over illegal or unfair practices. With the

moratorium recently lifted, lenders resumed the foreclosure process for delinquent homeowners.The national homeownership rate plunged another 20 basis points from year-end 2010 to 66.3percent in the third quarter. This change represents the acute displacement of approximately660,000 owner-occupied households within a three-month period. A commensurate rise in renterhouseholds totaled 1.4 million units for the same period. Foreclosures and short sales account fornearly 30 percent of sales transactions. Despite record-low mortgage rates, single-family homesales volume and pricing remain 29 percent and 32 percent below the 2005 peak, respectively.

Competitive pricing and lower cap rates move investors further along the risk/reward spectrum.Portfolio sales, a return to pre-crisis sales volumes, and a narrowing gap between core and value-add

Apartments Surmount Economic Headwindsto Enter Full Expansion Cycle

For more information, contact John Chang, Vice President Research Services, at [email protected]. Marcus & Millichap 2011

UnitsAbsorbed

(000s)

JobGrowth(millions)

Apartment Units Absorbedvs. Quarterly Job Growth

*Through 3QSources: Marcus & Millichap Research Services, Reis, BLS

Job Growth

-100

-50

0

50

100

11*10090807060504030201-3.0

-1.5

0.0

1.5

3.0Net Absorption


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yields characterize recent sales activity. Investorsgravitated to higher risk/higher return strategiesas seen in the pickup in transactions in secondarymarkets, which caused yields to decline. Inaddition, cap rates for value-add propertiesplunged 90 basis points to seven percent, whilecore properties remained at at 6.7 percent,narrowing the spread between the two investmenttypes to just 30 basis points. Third-quarterapartment sales surpassed $13.2 billion, a notable39 percent increase over last year. Year-to-datesales volume increased 64 percent above year-agolevels to $44 billion. The overall cap rate averaged6.9 percent, down 30 basis points from one year

ago. The biggest year-over-year sales increases occurred in the $20+ million and $10-20 millioncategories, up 78.0 and 63.2 percent, respectively, through third quarter. Larger deals in the $20+million range accounted for nearly 60 percent of total sales volume through therst three quarters of2011. Consequently, the price per unit rose nearly 8 percent and cap rates compressed 72 basis pointsto 5.5 percent in this price tier. The cap rate compression in primary markets has slowed as investorsexplore secondary and tertiary markets. The spread between primary and tertiary markets averaged288 basis points as of the third quarterthe biggest gap in recent historyprompting investorsto seek arbitrage in tertiary markets. Cap rates in tertiary markets trended lower to 8.6 percent.

Forecast:Demand for apartments should progress at a consistent, yet slower pace until payroll growth

and immigration gain momentum. The initial surge in pent-up demand for apartment unitshas been satiated to some degree by displaced homeowners and new household formationsof the 20- to 34-year-old age cohort. This segment of the population has captured 68 percentof the job gains recorded since the end of the recession in June of 2009. Looking forward,stronger employment growth will generate higher immigration levels, a critical component ofrental demand, and growing ranks of Echo Boomers will continue to form new households.

Expanded Home Affordable Renance Program (HARP) runs parallel to the new wave of foreclosuresin an effort to stabilize the housing industry and reduce risk to the GSEs. The HARP program offersunderwater homeowners whose mortgage debt exceeds the market value of their homes the abilityto renance at current low interest rates. Assuming homeowners meet eligibility criteria, the recentlyenhanced and expanded program waives certain risk-based fees, removes the current 125 percent

LTV ceiling for mortgages backed by the GSEs, eliminates the need for a new property appraisal, andextends the program end date to year-end 2013. The HARP program only accounts for 3 to 11 percent ofrenanced loans since the program began, therefore, the objective of the outreach effort is to attract morehomeowners and stem the rising tide of willful foreclosures. If the program changes prove effective,fewer homeowners will be displaced, thereby reducing some portion of rental demand from this source.

Operations should strengthen given the pickup in GDP, which can translate to stronger employmentlevels and household formation over the next 12 months. Approximately 13,000 additional unitsare slated for delivery by year end, bringing new supply to approximately 39,000 units, the smallestannual number on record. If demand stays on trend, net absorption will tally over 153,000 units byyear end. This dynamic will push national vacancy close to assumed equilibrium at 5.4 percent.

TotalVolume(billions)

$1M-$10M $10M-$20M $20M+

Apartment Investment TrendsTotal Volume by Price Category

$0

$10

$20

$30

$40

11*10090807060504

Includes sales $1M+ * Estimate for 3Q11Sources: Marcus & Millichap Research Services, CoStar Group, Inc.


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The information in this report is deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, expressed or implied, maybe made as to the accuracy or reliability of the information contained herein. Sources: Marcus & Millichap Research Services, CoStar Group, Inc., DataQuick, Deutsche Bank, Economy.com, Federal Reserve

MBAA, NAR, Real Capital Analytics (RCA), Reis, U.S. Census Bureau.


NonfarmE

mployment(Y-O-YChg.)

Non-farm Employment Trends

-6%

-3%

0%

3%

6%

* ForecastSources: Marcus & Millichap Research Services, BLS

11*090705030199979593918987858381

Apartment Market Vital Signs

3Q 2010 to 3Q 2011 Change in Apartment Vacancy

3Q Y-O-YMetro 2011 Chg. (bps)

Austin 5.4% -270

Jacksonville 9.6% -250

Dallas-Ft. Worth 5.5% -240

Orlando 7.4% -240Phoenix 7.9% -240

Houston 9.2% -230

Atlanta 8.4% -220

Kansas City 6.5% -210

Charlotte 6.8% -200

Las Vegas 7.9% -200

U.S. Metro Average 5.6% -150

Sources: Marcus & Millichap Research Services, Reis

3Q Y-O-YMetro 2011 Chg. (bps)

Palm Beach 7.1% -100

Chicago 4.9% -100

Miami 5.1% -90

Oakland-East Bay 4.0% -90Washington, D.C. 4.6% -80

Denver 4.5% -80

Milwaukee 4.0% -80

San Jose 3.1% -80

Los Angeles 4.2% -70

New Jersey 4.1% -70

U.S. Metro Average 5.6% -150

Markets by Greatest Reduction in Vacancy Markets by Least Reduction in Vacancy

Single-Family Condo

Existing Single-Family and Condo Sales

Year-Over-YearChange

-70%

-35%

0%

35%

70%

11*1009080706050403

* Through SeptemberSources: Marcus & Millichap Research Services, National Association of REALTORS

* ForecastSources: Marcus & Millichap Research Services, Reis

UnitsCompleted(thousands)

Completions Vacancy Rate

Apartment Supply and Vacancy Trends

Vaca

ncy

Rate

0

110

220

330

440

11*090705030199979593918987858381 2%

4%

6%

8%

10%

* Through 3QIncludes sales $1 million and greaterSources: Marcus & Millichap Research Services, CoStar Group, Inc.

AveragePriceperUnit(thousands) Average Price/Unit Average Cap Rate

Apartment Price and Cap Rate Trends

Aver

age

Cap

Rate

$0

$30

$60

$90

$120

11*1009080706050403020100

2%

4%

6%

8%

10%

2011oct outlook-apartment with economy

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