Home > Uncategorized > Apartment Demand, Large Sales Transactions Bounce Back in First-Half 2010

Apartment Demand, Large Sales Transactions Bounce Back in First-Half 2010

Vacancies and Concessions Subside As the Improving Economy and Limited Supply At Last Begin to Give Landlords Breathing Room; Investment Sales $100-Million+ Are Returning to The Market

Nearly 90% of the top apartment markets in the U.S. experienced demand growth during a solid performance for multifamily leasing in the first half of 2010. The first six months also brought an uptick in investment sales, particularly in the number of transactions valued at $100 million or more.Some of the markets most ravaged by the housing collapse posted the strongest gains at midyear, with 47 of the 54 largest metro areas tracked by CoStar Group seeing declines in apartment vacancy.

“It has been a great six months for apartment fundamentals,” said CoStar Global Strategist Michael Cohen, who this week co-presented the Mid-Year 2010 Multifamily Review and Outlook, the final installment in CoStar’s second-quarter series on the state of commercial real estate. The apartment, office, industrial and retail sectors all enjoyed a modest but relatively broad recovery at the year’s halfway point.

The hangover from the mortgage meltdown and housing recession continues to impact the apartment market. Home ownership has fallen from a high of 70% of households to less than 67%, and “what’s bad for single-family [residential] is generally good for multifamily,” said CoStar Vice President of Analytics Norm Miller. In a few years, 3.5 million households have transitioned from single-family ownership to the rental market, said Miller, who joined Cohen and CoStar Director of Analytics Jay Spivey in the apartment update and forecast.

The national apartment vacancy rate ended 2009 at 8.4%, and apartment inventory last year saw negative absorption of 57,000 units. Both metrics are the worst since at least 1982.

However, the national multifamily vacancy rate has fallen 30 basis points over the last two quarters to 8.1% as of June 30. Demand reclaimed some lost ground in the first six months, with positive net absorption of 76,000 units, in part because new construction is at an all-time low, with just 50,000 units scheduled for delivery this year.

Phoenix, one of the metros hurt worst by the housing bubble, topped the list with more than 2.2% demand growth in the first half, with Jacksonville, FL, and Raleigh, NC, also showing signs of strengthening. Oklahoma City, Miami and Detroit were among a small group of metros that saw demand continue to erode.

Some analysts have attributed part of the increased demand to “decoupling,” a term in the multifamily industry for individuals, usually in their 20s, who are confident enough in their economic future to leave their parents or roommates to get a place of their own. However, Cohen said there are a number of factors for the bounce, including the decline in single-family home ownership, moderation in the amount of shadow inventory of rented-out single-family homes, and continuing inability by many renters to qualify for a home mortgage.

One factor largely overlooked by market watchers is the relatively quiet growth in job creation, Cohen said. The nation added a higher-than-expected 900,000 jobs in the first half, including 600,000 private-sector jobs. Markets like Phoenix and Raleigh reported some of the strongest job growth.

Phoenix saw its vacancy rate fall by 185 basis points at mid-year. Jacksonville’s rate declined by 112 bps, San Jose, CA, 100; Hartford, CT, 94; and Dallas-Fort Worth, 89 bps.

Class A and B properties have seen sharper declines in vacancy than Class C as renters “trade up” to take advantage of lower base rents, free rent and other landlord incentives, CoStar reports. Falling vacancies and modest rent bumps in Class A apartments are also a sign that owners are regaining some control over rents. With apartment supply tightening, owners in many metro markets are starting to dial back the level of concessions dangled to potential renters.

Only 14 metros, led by New Orleans, Oklahoma City, Milwaukee, Cleveland and Houston, saw an increase in the amount of concessions, measured as a percentage of asking rents, according to data from Axiometrics and CoStar. Long Island, NY; San Jose, the San Francisco Bay Area, St. Louis and Honolulu saw the largest drops in tenant concessions.

On the other hand, concessions are still “uncomfortably high” in many metros, especially those suffering the worst in the housing bust, Cohen said. Detroit, Atlanta, Las Vegas and Orlando are all dealing with double-digit levels of tenant perks, while supply constrained coastal markets in California and the East Coast are seeing the lowest concessions.

Overall, about 47% of Class A properties tracked by Axiometrics offered concessions, down a full 7 percentage points from the end of 2009 — with about 50% of Class B and 62% of Class C offering concessions.

“The happy music for landlords is that finally, we’re beginning to see some positive effective rent growth,” Cohen said. “It’s nice to see landlords gaining a little bit of pricing power.”

Effective rents turned positive in the second quarter, with Class A rates up 1.6% and Class B up 1.0%. Rents in vacancy challenged Class C properties fell another 0.4%.

With employment and economic growth expected to moderate in the second half, CoStar expects that fundamentals will continue to improve, albeit at a more modest clip, with 22 metros seeing flat or modest vacancy increases in second half.

“Given the pace of absorption we saw in the first half, it’s reasonable to assume a more moderate pace in the second half, but there’s still positive momentum,” Cohen said.

Fueled by a burst of strong economic growth in 2011-13, CoStar forecasts that supply, demand and vacancy fundamentals will remain positive through 2014. At the same time, growing number of echo boomers — the children and grandchildren of baby boomers — will start forming their own households. “The outlook is very promising overall,” Cohen said.

Quarterly multifamily investment sales volume, which hit bottom in first-quarter 2009, continued to trend upward in the first half of 2010, Spivey said.

Average sales prices are also moving up. No deals of more than $100 million occurred in first quarter 2009, compared to 75 such deals in 2007 and 38 in 2008.

“In 2010, we’ve seen 18 transactions over $100 million so far,” Spivey said. “We’re starting to see the big market coming back.”

New York led in sales volume with $2.3 billion with an average size of $11 million so far in 2010, followed by Washington, D.C. at $1.28 billion ($21 million average); Los Angeles at $1.17 billion ($2.2 million average). South Florida, Atlanta and Phoenix are also seeing higher volume, but with a higher percentage of distressed sales.

Top sales in the second quarter included Equity Residential (NYSE: EQR)’s purchase of 425 Massachusetts Ave. in Washington, D.C. from Broadway Management for $167 million, or $298,748 per unit, in April. Chartwell Senior Housing REIT bought a portfolio of four properties in Colorado and Texas from ING Real Estate in May for $110 million, or $105,944 per unit. In Los Angeles, Watermarke Properties bought Watermarke Tower from Meruela Maddox in late April for $110 million, or $514,019 per unit.

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