Despite a spike in supply last year and increasing competition from the affordable housing sector, San Antonio’s solid labor market and resilient economy will help to improve apartment fundamentals by the close of 2010. Following steep inventory additions in the first quarter, deliveries will slow significantly through the second half of the year. As renter demand begins to outpace supply growth, owners will trim incentives, reversing 10 quarters of revenue declines. The lower tiers will register the greatest revenue increases, supported by vacancy improvements toward the end of the year.
Foreclosure activity has increased 19 percent over last year, and some top-tier renters will likely to make the transition into homeownership this year as these properties come to market. Class B and Class C operators will get a boost from the strengthened labor market as traditionally blue-collar employment sectors start to recover rapidly. In the construction sector, for instance, roughly 1,200 construction workers will be hired in the next few months to complete the Brooke Army Medical Center.
During the last 12 months, developers have ramped up the pace of completions to 3,620 units, or a 2.5 percent inventory expansion, following the delivery of 2,490 units in the previous year. Builders have 2,920 units being constructed throughout the metro area, 40 percent of which should come online this year. The Far North Central submarket contains the largest concentration of projects under way; 1,050 units are under construction in the area, an amount that will expand local stock by 3.2 percent. The supply overhang will moderate next year due to slowing development activity and a sharp reduction in permitting.
Renter demand has strengthened, as an estimated vacancy rate of 10.3 percent in the first quarter was just 30 basis points higher than in the first quarter of 2009 and down 10 basis points from 6 months earlier. While upper-tier vacancy has ticked up 40 basis points in the last year to 9.7 percent, a large inventory expansion resulted in a 50 basis point jump during the first quarter.
Vacancy at Class B and C properties was 10.8 percent in the first quarter, marking a 12-month rise of 20 basis points. A recent strengthening in the local labor market, however, improved vacancy by 20 basis points in this year’s initial period. Strong employment gains and moderating construction will support a vacancy decrease of 50 basis points to 9.7 percent in 2010. Last year, vacancy spiked 120 basis points.
Asking rents were $686 per month in the first quarter, in line with rents 6 months earlier and 0.1 percent higher than in the previous quarter. First quarter effective rents of $633 per month were down 1.8 percent from two quarters ago and 0.5 percent lower than at year-end 2009. New-unit premiums propped up Class A asking rents in the first quarter.
During that time, upper-tier asking rents gained 0.4 percent to $808 per month, while Class B and Class C asking rents fell 0.5 percent to $582 per month. Owners increased concessions by 2 days during the first quarter to roughly 28 days of free rent in an effort to attract and retain tenants. Concessions will begin to burn off in the coming months, however, as deliveries ease and employment firms up. With vacancy projected to decline during the second half, rent growth will resume. Asking rents will gain 1.2 percent this year to $693 per month, and effective rents will increase 0.8 percent to $641 per month.
Bond yields have been rising in response to record auction volume and increasing investor concern surrounding outstanding U.S. debt. Despite some recent upward pressure on the 10-year bond yield, the Federal Reserve’s $1.25 trillion program to purchase mortgage-backed securities has kept overall rates low. The program formally ended March 31, which may lead to higher mortgage rates in the coming quarters. Multifamily loan originations ticked higher in the fourth quarter. Fannie Mae and Freddie Mac, which proved to be consistent sources of multifamily financing throughout the recession, slowed originations moderately at the end of last year.
Decreased activity from out-of-state investors and REITs will slow transaction velocity in the near term but will give local buyers the best opportunity in Texas to acquire Class A assets. While deal flow for Class A properties has been modest recently, upper-tier listing activity may increase in the coming months as pension funds sell to realign portfolios and developers divest assets to pool capital for the next building cycle. Stability-seeking buyers will target complexes around Fort Sam Houston, as approximately 15,000 individuals are expected to move to the area with the expansion of the base. As financial hurdles persist, however, many area investors continue to purchase foreclosed or bottom-tier assets at per-door prices in all-cash deals, particularly in neighborhoods with high concentrations of Class C complexes in the Northwest and Southwest submarkets.
— J. Michael Watson is the regional manager of the San Antonio office of Marcus and Millichap.