Apartment investors in several major metros across the country, especially Northern California, are hoping 2012 is a carbon copy of 2011. Effective rents for new leases in San Francisco increased a whopping 14.6 percent in 2011 and 12.3 percent in San Jose, according to newly released data from MPF Research.
“The Bay Area is in a different stratosphere,” said Greg Willett, vice president of research and analysis at Carrollton, Texas-based MPF. Willett’s update on the vital signs of the multifamily market was the centerpiece of a webinar focusing on apartment development hosted by Dallas-based Humphreys & Partners Architects LP on Wednesday, Jan. 4.
Although the annual gains in effective rents for new lesases weren't nearly as dramatic in Boston and Chicago, both markets were strong performers with increases of 8.3 percent and 5.8 percent respectively.
One big reason for such a healthy bump in rents was that the occupancy rate nationally rose 1.1 percent from the fourth quarter of 2010 to the fourth quarter of 2011 to reach 94.6 percent, according to MPF. Occupancy was up nearly 3 percentage points from late 2009 when the market bottomed out.
Meanwhile, the annual change in effective rents was 4.7 percent in the fourth quarter of 2011.
“It’s been a very good performance over the course of the past year,” said Willett, pointing out that the U.S. apartment sector posted impressive revenue growth of 5.8 percent in 2011. “The outlook in the worst-case scenario looks pretty good, and in the best-case scenario looks downright spectacular.”
Absorption in the nation’s 64 largest markets totaled 193,000 units in 2011 compared to the delivery of 66,000 units, according to MPF. A big chunk of those deliveries involved niche product such as seniors housing, student housing and affordable housing. “Very little of that was conventional, market-rate product. That means occupancy is going up,” said Willett.
A dozen major metros posted fourth-quarter 2011 occupancy rates at or above 96 percent, including Pittsburgh (97.8 percent), followed by New York (97.4 percent) and Minneapolis (97.1 percent), according to MPF.
The weakest performers in the fourth quarter recorded occupancy rates in the 91 percent to 92 percent range, including Phoenix and Indianapolis (91.7 percent), Houston (91.5 percent), Atlanta (91.3 percent) and Las Vegas (91.2 percent).
“We have some housing bubble markets where economic growth is slow and there is lots of shadow space,” said Willett. “Obviously, Phoenix, Las Vegas and Atlanta fall into that category.” Indianapolis and Houston are markets where occupancy is “naturally low,” he added.
2012 forecast
MPF expects annual revenue growth of 5 percent in the U.S. apartment market in 2012, a slight pullback from 2011. (That figure includes an increase of 4.5 percent in rents and a rise of 50 basis points in occupancy.) MPF has downgraded the Pacific Northwest region, where rents in some markets had been growing by double digits annually.
San Joseand Seattle, previously among the nation's best performers, logged revenue losses late in the year that went well beyond normal seasonality. The quarterly decline in revenues was 1.8 percent in San Jose and 1.5 percent in Seattle.
“The backtracking seen during the fourth quarter in parts of the Pacific Northwest likely reflected a correction of pricing that got a little too aggressive earlier in the year,” Willett stated in a news release following the webinar.
“We anticipate substantial rent increases in these markets moving ahead, but the Pacific Northwest metros probably won't outperform other parts of the country to the degree that was seen over the past couple of years.”
MPF expects any moderation in rent increases in the Pacific Northwest to be offset by robust growth in Texas. “All the Texas markets, particularly Houston, had solid revenue growth in the fourth quarter,” Willett stated during his webinar presentation. “We think Texas [markets] will be a phenomenal performer relative to their norm in 2012.”
While construction announcements are plentiful nationally, deliveries aren’t expected to become a significant issue anywhere across the country until 2013.
Middle-market product is positioned to play a much bigger role in fueling growth than was the case in 2010 and 2011, according to Willett. “Look for occupancy gains in this segment as some households get priced out of the most desirable stock. Also, operators may be more aggressive on pricing for these units, since they haven’t yet recovered to pre-recession rates in most metros.”
NMHC’s view from 30,000 feet
Doug Bibby, president of the National Multi Housing Council and a featured webinar speaker, said that single-family home developers including Toll Brothers, Lennar Corp. and Pulte Homes are taking a hard look at the apartment market. “The reason is that single-family housing continues to be very weak and prices could still come down more.”
The apartment industry needs to be producing more units, emphasized Bibby. “We need to be averaging about 300,000 units a year. We have been under-developing for close to a decade now, and our run rate is way below where it needs to be.”
Despite the positive momentum the apartment market is experiencing, the Basel III regulatory standards for banks and the Dodd-Frank Wall Street Reform and Consumer Protection Act are causing lenders to be skittish, said Bibby.
“Just to give you an idea, when we were agonizing about Sarbanes-Oxley years and years ago, it had about 17 rulemakings that had to be taken care of. There are over 200 rulemakings associated with Dodd-Frank. It is just frightening in its complexity, and it’s got everybody on edge.”
The regulatory environment is very anti-business, said Bibby, citing the Environmental Protection Agency as an example. “We’re also seeing at the state and local level green mandates cropping up, and you have to factor that into your business plan going forward.”
The improving but still sluggish job market also is a concern for the apartment industry, pointed out Bibby. “We are not getting the job growth that we had hoped for by this time.” Still, many of the jobs that are being created are service-oriented and lower paying, which is very much in the apartment industry’s sweet spot, he said.
“I was reading recently that the average assets of a 20- to 29-year-old cohort are about $1,500, so they are not going to be in the position of affording a house anytime soon,” said Bibby.
Demographics, household formation and immigration strongly favor the multifamily sector for the foreseeable future, Bibby believes. At the same time, a lack of new construction means limited new supply and room for operators to push occupancies and rents and boost net operating income.
Urban living is back in vogue, which is creating opportunities for core, infill, mixed-use and mixed-income development and redevelopment, pointed out the leader of NMHC.
And what about the future of Fannie Mae and Freddie Mac, the two government-sponsored enterprises that are remain in conservatorship because of financial woes stemming from the single-family home crisis? These two entities have provided most of the liquidity for the apartment market during the past few years.
Nothing will happen legislatively on the housing finance front until mid-2013 at the very earliest, after the presidential election, predicts Bibby. “Despite the noise, there will be no rush to judgment for Fannie and Freddie.”
— Matt Valley