On October 21st, at the Real Share Apartments 2010 Conference in Los Angeles, 1200 multi-family industry experts gathered to compare notes on the state of the apartment market (both U.S. and CA). The consensus of over 50 market experts speaking on various panels was that multi-family performance has improved dramatically more than anticipated at this stage in the recovery, and is far outpacing other economic indicators. Fueled by pent up demand and other factors, apartment occupancy rates are up, with tenant retention at record levels. The relative security offered by apartments as an investment class, coupled with drastic reductions in new construction, has led to cap rate compression and is expected to fuel rent increases over the next few years.
In defiance of common wisdom that occupancy is closely tied to employment, apartment unit absorption has improved significantly this year. Despite anemic job growth, the national apartment occupancy rate climbed from 92% in 2009, to 94% currently. (Ventura County vacancy rates peaked at 5.83% in 2009, and fell to only 4.33% in July 2010.) Apartments are absorbing the majority of current housing demand, as homeownership continues to decline due to foreclosures, lack of buyer confidence, and financing obstacles. Competition from the “shadow market” of unsold homes and condos diminishes as they are foreclosed on and sold; and as renters return to the security and quality of well maintained apartments, versus the uncertainly of renting a distressed asset.
One key factor in the expected strength of the rental market over the next 3-5 years is new household formation. There are an estimated 500,000 to 1.5 million households that did not form during the recession. Of the estimated 78 million Echo-Boomers (Gen Y), 30% are still living at home with parents, while many more are doubling up in housing with others. The U.S. Bureau of Labor Statistics reports that 3Q2010 job growth among young adults was the highest since 1984. As the economy continues to improve, many of these young adults will qualify for apartments on their own, or with the help of parents who are less worried about their own job security. Apartment performance was also enhanced by record levels of resident retention in 2010, as owners completed property upgrades and repairs, and focused on building strong tenant relationships.
Competition for quality multi-family assets has already resulted in lower cap rates, and higher prices per unit, in primary market areas. There was very little apartment transaction activity in 2009, which made it difficult to assess market values…but 2010 YTD transaction volume is estimated at $14.8 B. In fact, several top apartment executives stated that those waiting for the bottom of the market have already missed the boat. Due to rapidly changing value dynamics, rather than relying on just the cap rate when assessing properties, investors are encouraged to consider a triangle of value factors including: cap rate, IRR and $per sq. ft. While cap rates may have compressed, rents could increase substantially over the holding period. In fact, effective rents from new leases nationally are already up 2.6% from late 2009 rates, with significant rent appreciation expected in 2011-2013. (Ventura County rents were up 3.4% YTD in July 2010.)
While multi family construction has begun to show signs of life again in late 2010, new U.S. housing starts fell 73% from the peak, to historically low levels in 2009. Due to economic uncertainty, coupled with extremely tight credit and equity markets, developers that normally build 2,000-3,000 units/year built virtually nothing in 2009. With nearly 100,000 apartment units going out of service annually due to obsolescence, and significant anticipated increase in demand, multi-family investments are expected to out-shine other assets in the near future.