Everywhere one looks today there are growing signs that investing in apartments is a smart idea now and will be for the next several years.

The part of the American Dream that includes a white picket fence and your very own home is fading for many. In the second quarter of 2010, only 66.7% of households owned their own home. That’s the lowest number recorded since the last quarter of 1999. Many of those former homeowners are now renting their homes, and some have gone back to apartments.

In fact, when a Trulia survey recently asked, “Is home ownership a part of your American Dream?”, only 72% responded, “Yes”, compared to 77% just six months earlier.

In a May 2010 survey of over  2,000 U.S. adults, the National Apartment Association found that 76% of the respondents now believe that renting is a better option than owning. This is up from 71% in 2008. Half of the people cited financial reasons, while a full 64% enjoy having no maintenance responsibilities.

In addition to the positive signs from these surveys of American’s attitudes, current apartment owners are reporting improving conditions. The National Multi Housing Council performs a quarterly Survey of Apartment Market Conditions. One section measures “market tightness.” A Market Tightness Index reading above 50 indicates that, on balance, apartment markets around the country are getting tighter; a reading below 50 indicates that market conditions are getting looser; and a reading of 50 indicates that market conditions are unchanged. The July 2010 index stood at 83, up from 38 in January and 11 recorded in January 2009. This is a clear trend showing fewer vacancies in existing apartments.

Greg Willett, VP of MPF Research claims that, “Demand is stunningly high in the first half of 2010.” The number of occupied units increased by 215,000 in the 64 largest U.S. markets through June. That’s almost twice as many as in all of 2009. The overall vacancy rate in the same markets declined to 6.6% from 8.2% in December. Closer to home, the Colorado Springs vacancy rate dropped to 5.8% in the second quarter, the lowest rate recorded since the 5.4% reported for the third quarter of 2001.

The third main reason smart money is moving into apartment investing is the tsunami of new renters coming of age in the next few years. These “echo boomers”, children of the original baby boomers, are now in their 20s and 30s, typically prime renting years.

The Baron’s cover story of July 26, 2010, entitled Renter Nation, claims that, “Roughly 10 million extra folks could be moving into rentals in the next five years.” In addition, the National Association of Home Builders chief economist believes the 83 million echo boomers entering the market over the next decade is a positive demographic trend for the apartment market.

Since improving apartment market conditions usually follow job growth, experts are speculating as to why this improvement is happening without it. Maybe the economy has stabilized to the point that young workers have enough confidence in their current job to move out of home or split up from their roommate, but not enough to put a down payment on a home (if that’s even a goal).

So, because of changing American attitudes about home ownership, decreasing vacancy rates, and the demographic bubble approaching, it’s looking like a great time to be investing in apartments.

Marcus & Millichap is one of the nation’s largest real estate investment firms. Nearly every quarter they webcast a summary of the current and near future conditions of the multifamily market. The most recent one was released  on May 13, and included the numbers from the first quarter of 2010. Following are a few of the highlights.

The first section was on the U. S. economy as a whole. Most of their comments were positive and upbeat. Employment is neutral or better, retail sales are coming back strongly, the employment trends are becoming positive and inflation is not a major concern. However, the housing recovery is still volatile. Thanks in part to the tax credit for first-time home buyers, the housing inventory is dropping and sales are rising. However, it’s too early to tell how the end of the tax credit will affect these trends, but it probably won’t enhance them.

People who are 18-34 years old make up the largest cohort of potential apartment residents, and 20 million of them are living at home, with that number still rising. Also, the unemployment rate for that age group is substantially higher than the not-so-great national average. Once the job market returns to full throttle, many of these people will be looking for a place of their own. That’s good news for apartment owners, but it does lie a year or two in the future.

The middle section was on capital market trends. It started off on a positive note, saying that confidence is returning, as shown by a recent rise in the number of multifamily property sales.

Deals are getting done. Freddie, Fannie and HUD are major lenders, and some local and regional banks are lending. It looks like insurance companies are starting to get interested in the multifamily market again, as well.

On the other hand, investors are up against constrained underwriting standards. Lenders are dealing with three major concerns. First of all, it’s difficult to determine values with so few sales to look at. Also, property fundamentals are still going down in some markets. Plus, they are concerned about the shadow market.

And lingering over everything is the current Euro debt crisis. The U. S. hasn’t been hit much by it yet, but as we’ve recently learned, all the markets are intertwined to a certain extent.

The final section was specifically about the apartment market.

For several cycles now, Marcus & Millichap has divided apartment investors into two camps. On the one hand are those who believe in the long-term inherent value of apartments. Most of these are would-be sellers and are hanging on to their properties if they can, believing good times are just around the corner. Forced to sell, they price their properties to reflect their belief in its value.

On the other hand are investors who are interested in buying now, but are dealing with hard-to-get loans, high vacancy and falling rents. Some are still anticipating a wave of foreclosures that could bring deep discounts. So you can see why there is a wide gap between sellers and buyers, resulting in infrequent sales.

However, there are signs that 2010 will see an increase in transactional velocity. In the first quarter of 2010, there was a 60% increase in dollars paid for properties worth at least $10 million, compared to the year before.

Another sign is the shift in who is buying now. More sophisticated groups are getting back in. In 2009, REITs made up only 5% of the multifamily buyers. But in the first quarter of 2010, they made up 18% of the buying pool. Similarly, institutional buyers grew from 5% to15%.

They concluded with a slide listing the seven reasons Marcus & Millichap is bullish on the apartment market for the next ten years.

1. The population will continue to grow.
2. The echo-boomers will start getting places of their own.
3. Apartments are a good environmental housing choice.
4. Budget and expense factors.
5. No new stock coming online
6. Apartments are more affordable than houses.
7. Many will decide home ownership is no longer their dream.

The Marcus & Millichap team plans to put on another session roughly every 90 days, so look for the next one in August. To see the entire presentation, click here.

According to a report released last week by the Apartment Association of Southern Colorado and the Colorado Department of Local Affairs’ Division of Housing, the first quarter’s rate of 6.9% is the lowest vacancy rate recorded since the third quarter of 2001 when vacancies were 5.4%. The very next quarter of 2001 saw the vacancy rate jump to 8.9%, and it’s been above 8% ever since.

Most of the credit for the improved stats goes to the influx of soldiers into Fort Carson. We’ve been hearing about this troop consolidation for several years now, but it appears to be finally happening. Although, interestingly enough, the lowest vacancy rates of 4.5% to 5.1% are found in the northern part of town, far from Fort Carson on the southern edge. In fact, the areas nearest the Post still have a vacancy rate of 14.2%, although this is a considerable improvement, since it has been over 20% in recent years.

In spite of the good news on the vacancy front, new jobs are still scarce, so rents are staying put, averaging about $710 for the first quarter of this year.

Multifamily executives must constantly evaluate new technology hardware and software products at the same time they are integrating current tools, upgrading legacy systems and training staff to take advantage of underutilized components of programs they already have in place. As quickly as things are changing in this area, it can be a real challenge to keep up.

Social Media

It can be difficult to know exactly how social media like Facebook and Twitter contribute to the bottom line in apartment communities. Many apartment managers and owners feel obligated to maintain Facebook fan pages simply because all their competitors have one. But is it as critical as a clean pool, nice landscaping and a friendly, knowledgeable staff? According to a large survey of apartment residents conducted by J. Turner Research, only 8% had ever visited a community’s fan page.

On the other hand, many apartment managers are using social media to improve their rankings in the search engines at the same time they’re slashing their print advertising budgets. Plus, the only cost associated with a Facebook page is the staff time to create it, and occasionally update it. A small price to pay for an online presence that never goes away.

Mobile Phones

There are now more Americans with cell phones than either internet access or cable TV, and an estimated 70 million of us regularly use mobile web browsers. Google recently released Android, a software package for mobile devices, and on Feb 16, 2010 they announced that 60,000 cell phones with Android are shipping every day. Apple recently marked their 4 billionth app download, so as you can see, mobile devices are here to stay.

UDR, a Colorado-based REIT that owns 45,000 apartment units nationally, says that 9% of its web visitors in 2009 used phones for access, viewed over 400,000 pages and created 97 mobile leases. No doubt these numbers will continue to grow.

UDR was also the first to create an “augmented reality” app for multifamily. A potential renter can point their phone’s camera at an apartment and see pricing and availability data superimposed over the live picture. After launching in September 2009, UDR had over 125,000 downloads by the end of the year. Other firms have already created similar proprietary apps and more are sure to follow.

Web Portals

Another large and growing trend among apartment communities is the development of integrated websites that serve tenants and free up staff for other duties. Already, residents can pay rent online and submit work orders. Some properties even send out lease renewals with incentives for renewing early online. Freed from these mundane and time-consuming tasks, onsite personnel can spend more time showing apartments and performing  other duties that increase resident satisfaction.

As you can see, technology is beginning to rapidly change the world of apartment management. I’m sure that apps for the iPad are already in development that will continue to accelerate this trend for the foreseeable future.

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In spite of relatively low housing prices and near-record low mortgage rates, many people in the United States still can’t afford to buy a new home. According to the Center for Housing Policy, the income needed to buy a median-priced home dropped in 93% of the 200 housing markets they studied. Unfortunately for the would-be homebuyers, that still was too high a barrier for them.

The Center further reports that in response to these conditions, more people are choosing to rent homes. However, in 89% of those same markets, the demand has driven up the home-rental costs. The greatest contrast was found in Florida, where in 12 markets the income needed to buy a median-priced home dropped 20% at the same time the average rent for a two-bedroom home rose by 6%.

With foreclosures still near record levels and even rental homes becoming unaffordable, many people are turning to multifamily homes. This is causing some housing experts to warn Congress that help may be needed to insure funding is available to create additional units. Recently, Bob DeWitt, CEO of GID Investment Advisers, testified to Congress on behalf of the National Multi Housing Council (NMHC), that government support is needed for the apartment industry. He warned lawmakers not to create a capital shortage for the lower-income sector as they consider ways to reduce taxpayer exposure to the secondary market.

He noted that housing expert Professor Arthur Nelson of the University of Utah projects that “half of all housing built over the next 10 years will need to be rental housing to meet the dramatically changing landscape of demand.”

This is further evidence that now is a good time for multifamily developers to start doing their due diligence on location and funding.

Related articles:

• Study: Many workers facing high housing costs (seattletimes.nwsource.com)
• 1 in 5 households struggle with home costs (cbc.ca)
• Housing and the “New Economy” (feldmanfile.blogspot.com)