On February 24, 2009, Marcus & Millichap presented a one hour webcast presenting the current state of the economy, the capital markets and the apartment market. They also looked forward several years for their projections.
I’m going to go over some of the points that seemed most important to me. If you’d like to look at the slides while I describe them, you can open them here in a new window.
Slide 12 shows that the number of apartment units finished has dropped consistently since 1999. This is important because as we’ll see, the renter population is growing, but the supply is not. Eventually, the vacancy will drop to the point that developers can start building again. The latest rise in vacancy should top out this year and start to drop in 2010.
Slide 14 claims that deals are still getting done despite the tighter lending market. According to a Denver mortgage broker I spoke with, lenders want to see the net worth of the investor group equal to the loan amount.
According to slide 17, lending rates are near historic lows, currently in the low 6% range.
Slide 23 defines Market Divergence. Depending on an investor’s personal timeline, some will view an apartment as a favored long-term investment, while others will point up the short-term challenges.
The sellers are convinced of the former position and therefore place a very high value on their property. They point out the lack of suitable alternative investments, as well as the favorable demographic outlook.
Buyers are trying to operate in a more difficult capital market, and think the current trend of dropping prices will continue, leading to even better deals than are available now. Buyers may also believe that the rising unemployment rate will increase vacancies as more people are forced to share accommodations. This could negatively affect cash flow in the near-term.
This is one of the reasons for the drop in apartment sales in every price category, every year since 2005, as is shown in slide 24. You may also notice that each quarter of 2009 had fewer completed sales than the quarter before. Things are really slowing down out there.
Slide 25 is an indication of falling prices. It shows prices per unit dropping since 2006 and cap rates rising since 2005.
Slide 29 shows that prices for B properties in secondary markets like Colorado Springs have dropped 21% in 12 months. If you wait a few more months you may get prices even lower, but it’s not advisable to try to time the market. Buy when you find a good deal and can raise the capital for it. Then work like heck to improve its performance over the next 5 to 7 years.
Slide 31 has more good news for buyers. Apartment starts have been declining since 2005. In our area, very few new developments are even on the drawing boards, meaning that once the economy rebounds it will still be several years before any new competition is on the scene.
According to Slide 32, home ownership rates have been dropping since 2005. Therefore, renter households must eventually increase.
People in the 20-34 year old demographic make up a large portion of the renter population. Slide 35 shows an actual and projected rise of this group from 2000 clear until 2020. A huge increase in the renter population is coming as the Echo Boomers (children of the boomers) enter this age bracket.
Slide 37 lists several key observations: Capital is expensive and difficult to raise; investor demand is low, anticipating discounts; sales will remain low in 2009; distressed sales and cap rates are both on the rise.
Slide 38 summarizes Marcus & Millichap’s current position. New building starts were down 50% in 2008 and are projected to drop another 30% in 2009. Coupled with the high levels of future demand, they remain bullish on the long-term prospects for U.S. apartments.
They conclude that apartments “will be dramatically more valuable in 2014 than in 2009.”
If you’d like to hear the entire one hour presentation, you can find it at the Marcus & Millichap website.