Smart Business spoke to John Leonard, first vice president and
regional manager of the Atlanta office of Marcus & Millichap Real Estate
Investment Services, about what to expect in the national and regional
multifamily market.
Some sectors of the
commercial real estate market have shown signs of recovering. For investors
interested in returning to the market, which sector is poised to make the
greatest strides as we head into 2011?
The multifamily sector is positioned ahead of the
office, industrial and retail sectors, even though the industrial property
sector has started to recover as a result of U.S. manufacturing gains. U.S.
apartment fundamentals have strengthened this year as a result of many factors,
including the release of pent-up demand, moderate private sector job growth,
single-family home foreclosures and homeownership hurdles facing many
Americans.
U.S. apartment transactions accelerated during the
second quarter, hitting the highest level since late 2008. Increases were
driven largely by the $5 million to $10 million and $20 million to $40 million
segments, as larger private investors and REITs/institutions moved off the
sidelines. Investors have begun to accept that a wave of deeply discounted,
distressed opportunities may never materialize. At the same time, financing
constraints eased, as the agencies and life insurance companies became more
aggressive in their pursuit of high-quality deals. With a significant amount of
capital previously earmarked for distressed deals now targeting stabilized
assets, competition for deals has increased and cap rates have started to contract
for higher-quality properties. On average, cap rates dropped 10 basis points
this year to 7.3 percent, while per-unit prices rose 9 percent to $83,600.
Apartment vacancy dropped 20 basis points to 7.8
percent during the second quarter. Approximately 46,000 apartments were
absorbed, the strongest demand since late 2000. During the first six months of
the year, 10 metro areas accounted for 55 percent of the absorption recorded
nationwide; combined, these markets added 212,000 jobs, equivalent to approximately
one-quarter of all positions created in the United States during that time.
How is the U.S. apartment market performing
compared to other sectors?
During the second quarter, rents increased and
concessions declined for the second consecutive period. Asking rents rose 0.4
percent to $1,021 per month, while effective rates gained 0.6 percent to $946
per month. Concessions peaked late last year at 7.8 percent of asking rents, or
slightly more than four weeks of free rent on a one-year lease, and have since
slipped to 7.3 percent of asking rates, still well above the long-term average
of 4 percent. Despite regaining some pricing power, owners will likely wait
until 2011 to raise rents more substantially, instead focusing on attracting
tenants and filling vacant units.
Former homeowners are also moving into rental units as
a result of home foreclosures. At the same time, tight lending and high down
payment requirements preclude many renters from purchasing homes; as of
mid-2010, just 8 percent of residential mortgages originated allowed for down
payments of less than 10 percent, compared to 29 percent in 2007. The
homeownership rate has dropped considerably in recent years as a result of
these trends.