The U.S. apartment sector powered through last summer’s economic doldrums to record strong absorption gains and higher occupancy rates.
Tight supply conditions exist, especially in metros with high barriers to entry.
Foreclosures in the single-family market, the inability of most Americans to meet mortgage financing requirements and households choosing rental housing for lifestyle reasons or employment mobility contributed to a net rise in apartments, according to the 2012 National Apartment Report, which was released by Marcus & Millichap, the largest real estate investment services firm.
“The multifamily sector continued its marathon-like recovery in 2011, and has entered full expansion mode in virtually every market,” said Hessam Nadji, managing director, research and advisory services for Marcus & Millichap.
“Favorable demographics, the release of pent-up demand as young adults de-bundle from family and roommates, and increased renter demand due to changing attitudes towards homeownership – which has become increasingly difficult in this country – drove more people into renting. Although the private sector created 1.8 million jobs last year, even greater job creation will be needed to sustain the white-hot levels absorption recorded after the recession.”
All 44 markets tracked in this year’s National Apartment Index (NAI) are forecast to post continued employment growth and effective rent growth in 2012. U.S. apartment vacancy should dip down to 5 percent by the end of 2012, a 40-basis-point decline since 2011.
As a result, a 4.8 percent increase in effective rent growth is forecast.
Total completions will reach nearly 85,000 units. Household formations are forecast to increase by 29 percent to an annual average of 1.4 million through 2015, aided by rising immigration and 2.1 million echo boomers entering the prime renter age cohort.
The San Francisco Bay Area has earned two top spots in this year’s NAI, which ranks 44 major apartment markets based upon a series of 12-month, forward-looking economic and supply and demand variables including forecast employment growth, vacancy, construction, housing affordability and rents.
The Bay Area dislodged its East Coast counterparts, with San Jose (#1) and San Francisco (#2) occupying the top positions in this year’s index, edging out New York (#3) and Washington, DC (#9). The Silicon Valley benefitted from robust technology employment and significant income gains, as well as 40 percent of all venture capital funding in 2011. Rounding out the bottom of the NAI are Jacksonville (#44), Tucson (#43) and Sacramento (#42).
Barring any unforeseen shocks to the global financial markets, an array of lenders will continue to finance multifamily developments and acquisitions in 2012 against a backdrop of historically low interest rates, according to William E. Hughes, senior vice president and managing director of Marcus & Millichap Capital Corp.
“Fundamentals and a favorable spread against Treasurys will promote multifamily development this year. Fannie Mae and Freddie Mac will remain the chief suppliers of apartment loans in an increasingly crowded field of providers.
“In fact, monetary policy — both domestically and worldwide — should keep interest rates low for several years to come,” adds Hughes. “Expect life companies and commercial banks to grow market share by pursuing assets with good credit features and stabilized revenue.”
After a brief respite in the third quarter of 2011, multifamily investment sales activity is expected to rebound this year. “Sellers will bring more properties to market, capitalizing on strong investor demand, based on the strong economic gains recorded at the end of 2011,” said John Sebree, national director of Marcus & Millichap’s National Multi Housing Group (NMHG).
“We expect capital to migrate to secondary markets and value-added investments. Sales volume will rise as risk tolerance expands and capital becomes more fluid. Expect higher levels of workout activity from banks and lenders,” Sebree noted.
