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CRE Finance World, Winter 2013

Some Counterintuitive Predictions for Multifamily Properties Asking and effective rents have risen for 11 consecutive quarters This is not to say that certain metros will not be at risk. Washington, and in many areas have surpassed previous peaks achieved in D.C. and suburban Maryland, for instance, both face historically the third quarter of 2008, before the fall of Lehman Brothers. high inventory growth prospects over the next couple of years; Landlords face little pressure to offer concessions given how tight these metros cannot rely on solid demand drivers like strong rental markets are in most places. employment growth in certain sectors such as tech to push demand for rentals like Austin, Texas or Seattle. Construction also remains tight, with less than 37,000 units coming online over the last three quarters of 2012. An additional Apartment fundamentals do not face a cliff, given the rise in new 18,000 units are expected to open their doors in the fourth completions. Construction activity has been so depressed over the quarter; that adds up to about 55,000 units for the year, a slight last two years that even new units coming on line only represent a increase from 2011 but well below the 125,000 annual average return to recent average inventory growth rates. from 2000 to 2009. However, that does not mean that apartment vacancies will continue Earlier in 2012, there were signs that construction would spike in to crater more than 100 basis points per year, since current levels 2013, in the order of 150,000 to 200,000 units. Developers have are already so tight. Reis projects vacancies to remain in the low since postponed many projects to 2014, so that 2013 figures hover 4 percentages through 2015, not much lower than its current closer to 130,000 units—not far off from the pre-recession 10-year 4.6%. Landlords recognize this, and have shifted their focus from average. The “bubble” now shows up in 2014, but if economic improving occupancy to raising rents to meet revenue goals. growth ramps up by then (Moody’s Economy.com is projecting GDP growth of over 4% in 2014, up significantly from 2% in There is a limit to how much landlords can raise rents as well, given 2012 and 2.9% in 2013), the additional supply will most likely be that household income levels have remained relatively stagnant. absorbed relatively painlessly. But if GDP growth improves and the economic pie starts growing at a faster rate, apartment properties are poised to share in the Figure 2 benefits as well. Apartment Fundamentals As such, apartment investors are likely to do well in the foreseeable future. Certain transactions with going-in cap rates below 3% will encounter significant exit challenges if and when interest rates rise, but market participants with realistic expectations will find it difficult to pick a sector with prospects as sound as multifamily. Nuance In a World of Swirling with Headlines In each of the cases above, we offer a nuanced assessment for recent popular topics in multifamily and commercial real estate. We take a more tempered view on these issues than headlines might indicate. The beginnings of a housing market recovery may be welcome news for the economy, but multifamily property owners need not fret of any major slowdown in demand. Demand for apartments will remain strong, even if an influx of new supply will restrain rent growth for specific geographical areas. Source: Reis, Inc. CRE Finance World Winter 2013 44


CRE Finance World, Winter 2013
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