Tag Archives: apartment market

The Apartment Market Forecast in Headlines

Multifamily Industry Expects Strong 2011

Multi Housing News (MHNonline) 11-29-2010

Apartment Market at Tipping Point

Colorado Springs Business Journal 2-4-2011

Distressed Debt Investors Prefer Real Estate in 2011

Forbes.com 1-7-2011

CRE Sales Deal Volume Returning to “Normal Levels”

CoStar Group 1-5-2011

Colorado Exceeded Only by Texas as 2010 Relocation Target

denverpost.com 1-4-11

Apartment Operators Regain Pricing Power as Vacancy Recedes to 10-Year Low

Marcus & Millichap 2011 Annual Report (Denver)

As you can see, apartments are the current darling of the commercial real estate world in the United States. The major factors in this trend include a huge number of 18-34 year olds forming their own households, continued high number of residential foreclosures, general population growth via births and immigration, and a lack of any significant apartment developments completed recently or in the pipeline.

In addition, REITs have apparently stopped waiting for the predicted wave of distressed deals and are scooping up Class A properties in high-barrier-to-entry markets such as Washington, D.C., New York City and San Francisco. Since they’re buying in the 5-5.5 cap rate range, it’s apparent they believe in these purchases as long-term holds. Insurance companies, dormant in the field for the last few years, are also returning to the market as both buyers and lenders.

All this has combined to make the next few years perhaps the best time to buy apartments we will see in our lifetimes.

Marcus & Millichap Apartment Forecast January 2011

In a webinar presented on Jan. 11, 2011, the Marcus & Millichap team gave an upbeat report on the current state of the U.S. apartment industry.

As usual, Hessam Nadji began with an economic state of the union address. After acknowledging nine different problems the economy is now facing, he presented another nine positive indicators. Among them is the fact that retail sales are now higher than they were before the recession. The GDP is back to 2007 levels. The rate of job growth is higher than both of the last two recessions. Worker productivity is at an all-time high.

There are 2 million young adults living at home with their parents. Many of these will move out in the next few years. Their confidence is bolstered by the fact that 65% of all new jobs created in 2010 were filled by those in the 20-34 year old category. Most of these new households formed will be renters, not owners.

Apartments in St Leonards, New South Wales

Image via Wikipedia

On that note, he moved to a slide entitled, “Apartments Entering Rapid Recovery.” Here he mentioned that 2010 was a very good year for the industry. The vacancy rate plunged a full percentage point. He expects another full percentage point drop in 2011, followed by a strong 2012. This is because there is almost no building going on at a time when demand is coming back so strongly. Given the difficult environment for developers, he predicts a good 4 to 5 year run for apartments.

Next up was Bill Hughes, who spoke about the capital markets. Commercial real estate financing got better through 2010 with apartment fundamentals providing the boost. Apartment values went up, lenders started showing more confidence, and Fannie and Freddie continued to provide most of the funding to the industry.

Looking ahead to 2011, Marcus & Millichap believes that in addition to the current sources of capital, insurance companies will once again start to loan on apartments. Several new commercial banks will begin to lend, and the CMBS package will start to reappear.

10-Year Treasuries should stay in the 3.5%-4% range. As the economy starts to rebound, expectations of inflation will push the rates up.

Lastly, he listed sources of debt for three groups of investors. The smaller investor, working in the $1-10 million range, will rely on Fannie and Freddie, commercial banks and some life insurance companies. They will find LTVs in the 70-75% range. Some lenders are taking the DSCR as low as 1.15 to accommodate the smaller investor. Most of the loans will be recourse loans.

Medium investors, looking at deals in the $10-20 million range, will find a wider array of financing options. This is where finance companies come in with mezzanine and bridge financing, and CMBS starts to play a role as well. The debt service coverage ratio will be around 1.20 and the LTVs once again in the 70-75% zone.

Investors needing over $20 million will find the larger banks will work with them on both recourse and non-recourse loans. DSCR and LTV will match the medium group. With more data available in the marketplace now, lenders are growing in confidence. Continue reading

Marcus & Millichap U.S. Apartment Outlook 1st Quarter 2010

Just updated! Be sure to see the new version for January 2011.


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.

Seal of the United States Department of Housin...
Image via Wikipedia

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.

And here is where you can see the apartment forecast for 2011.

Marcus & Millichap Apartment Overview and Outlook -Jan 2010

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.

Across the Channel
Image by PJFurlong06 via Flickr

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.

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New Apartments Leads Construction Surge

Digested From “Housing Starts and Permits Hit Nine-Month Highs”
MarketWatch (09/17/09)

In its latest report on residential construction, the Commerce Department reported that building activity jumped in August to the highest level seen in nine months. The pickup was led by a 25.3 percent surge in groundbreakings on new apartments, which more than offset a 3 percent slowdown in the single-family housing market. All in all, starts on new homes and apartments recovered from a 0.2 percent slide in July to gain 1.5 percent last month, which saw 598,000 units on an annualized basis. In another indicator that the housing sector is starting to recover, Commerce also said that building permits were up 2.7 percent in August.

Read the full report here: http://www.marketwatch.com/story/housing-starts-permits-at-nine-month-highs-2009-09-17