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CRE Finance World, Winter 2012

CRE Fundamentals and Slow Economic Growth Figure 2 What is driving the stellar performance of apartment properties? Office Effective Rent Growth First, as labor markets improved and hiring picked up, demand for housing increased, particularly in the 25- to 30-year old segment of the labor market. However, with the single-family home sales market still on the ropes, and with deflationary expectations for home prices for at least the coming year, few of these newly hired young workers have the appetite to commit to buying a home, particularly since they may also want to wait until they’ve had some tenure with their current employer before cutting a check for the down payment. Furthermore, mortgage rates may be low, but credit conditions remain relatively tight, with most lenders requiring a 20% down payment on any new home purchases. While these conservative standards help prevent the resurgence of poorly underwritten residential home loan mortgages, it also means there is less of a subsidy for homeownership, particularly since any tax credits for first time homebuyers expired in 2010. As a result of this convergence of positive factors for multifamily buildings, every single measure of performance for fundamentals has improved. Third-quarter increases in asking and effective rents of 0.6% and 0.7%, respectively, are roughly in line with improvements in the first half of the year. Landlords are increasingly feeling more confident, increasing asking rents as well. Effective rent increases Source: Reis, Inc. also continue to slightly outpace asking rent increases, indicating that concession packages continue to erode. Again, effective rent growth over the past four quarters mirrors the pace of job creation in the national economy. Job growth has been Figure 3 positive, but not strong enough to push the unemployment rate Apartment Vacancy and Rent Growth down significantly, and as such effective rent growth has been Lilliputian over the past year compared to previous historical periods. Multifamily Properties Will Continue to Shine With the housing market still on the ropes, households are choosing to rent despite record-low mortgage rates. This has benefitted the multifamily sector tremendously over the last couple of years, a positive trend that will continue for the next 12 to 18 months. The recovery of apartment properties contrasts sharply with the experience of the office sector, but for very specific reasons. First, apartment vacancies began plummeting in early 2010 after hitting a 30-year high of 8% in 2009. The sector began recording robust levels of leasing activity, even during periods in 2010 when job growth was negative. National vacancies fell by 140 bps in 2010, down to 6.6%, and by the third quarter of 2011 vacancies had fallen by another 100 bps to 5.6%. In only seven quarters, the apartment sector has regained the mid-5% vacancy levels that were recorded in the last seasonal trough in 2006. Source: Reis, Inc. A publication of Winter issue 2012 sponsored by CRE Finance World Winter 2012 25


CRE Finance World, Winter 2012
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