On January 26, Marcus & Millichap presented a one hour webcast that summarized their current view of the economy and specifically the apartment industry. As the third largest apartment broker in the country, they have access to a lot of people and a lot of data. Luckily, the two presenters do a good job clarifying complex topics and trends.
The main theme of the presentation was that there are many reasons to be optimistic, but the next surge upward is still a couple years away.
The job trend is improving, however slightly; inventories have dropped steeply, but are now growing again. In the last four months, temp jobs have been added, which is usually an early indicator of job growth on a larger scale. The housing inventory is dropping, down 22% in single family houses and down 33% for condos from the year before.
However…Employment is down even in the top performing metros like Austin and Washington D.C. The growth in employment, when it comes, is expected to lag behind previous recoveries after a recession.
Apartment vacancies seem to track the unemployment rate, and that rate is approaching 12% among the prime apartment-renting 20-34 year olds. Current vacancy rates range from the 3.4% in NYC, to 14.5% in Jacksonville, FL.
The “shadow” market is a significant factor in rising vacancies. This term refers to the number of people who either recently moved back home, or got a roommate, meaning that where two apartments were rented last year, only one is this year. This shadow market is estimated to involve 1-1.5 million people. In order to fight this trend, owners have lowered both the asking rent and the effective rent, which factors in concessions.
In discussing the capital markets, they stressed that the reality is better than the perception you can get from the media. Multifamily debt remains relatively healthy compared to other sectors. Fannie and Freddie both are experiencing only a half percent default rate on their mortgages, and are currently offering multifamily loans in the 6% range. They are a source of stability and liquidity to the industry.
As in previous webcasts, Marcus & Millichap are still dividing apartment investors into two camps. One side believes in the long term investment value of apartment investing. They believe that the disparity between future demand and current construction favors appreciation. They believe apartments remain a preferred investment vehicle, with few viable alternatives. These guys will hold on for now unless forced by circumstance.
The other group looks at the short term transactional value of doing an apartment deal now and sees that debt and equity are harder and more expensive to obtain. Also, they still expect a lot of good deals to come on the market soon as owners find their buildings no longer have enough value to allow a refinance of the loan that’s coming due. These buyers are looking for a deal.
In the last 120 days we have seen buyers further dividing into two camps. The first looks at the backlog of challenged assets the banks are sitting on and believe that deep discounts are around the corner. The others think the market is already at the bottom or very close to it. They may be able to create a high leverage deal through keeping the current loan in place. They’re also expecting a strong recovery in 2011. So at least one type of buyer is moving back into some markets, while others sit on the sidelines waiting to pounce when the deals start popping.
The sales trend for apartments accelerated toward the end of 2009. That’s a good thing, because the number of sales dropped 70% from its peak in 2006 for apartments from $1-10 million, and 86% in apartments worth over $20 million. The good news is that the last four months of 2009 saw 60% of the closings for the entire year.
The U.S. population is predicted to grow by 94 million in the next 20 years. This will require 60 million new housing units. Also, demographics are on our side. There are 78 million “echo boomers” who are entering their prime renting years. There will be 10 million legal immigrants and 5 million illegals in the next 10 years. And singles and unrelated people living together will make up 1 in 3 households by 2020. Therefore, Marcus & Millichap claims we’re “on the verge of the best bull markets for apartments in 30 years.”
Here’s where you can get the slide show for this presentation.
- Determine Whether Renting or Buying a Home Makes More Sense (lifehacker.com)
- Apartment-Rental Company Launches Revolutionary Service in D.C. (prweb.com)
- New-Home Sales Decline (benzinga.com)