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Jan. 5, 2012

More Good Times Ahead for Multifamily in 2012

By Barbra Murray, Contributing Editor

Santa Ana, Calif.—According to Grubb & Ellis Co.’s 2012 National Real Estate Forecast, additional growth is on tap for the U.S. multifamily sector this year, after a successful showing in 2011.

“We felt really from the very beginning of last year that it was going to be a good year,” Ernest L. Brown, an executive vice president and managing director with Grubb & Ellis, tells MHN. “Financing was available where it wasn’t available for a lot of other product types; the demand was clearly there and we saw more demand coming. So it really performed very well, pretty much in line with what we had expected.”

Last year, multifamily emerged as the best performing commercial real estate property type, and the commercial real estate services firm expects the sector to remain at the head of the class. A driving force behind anticipated growth in all sectors–including office, industrial, retail and hospitality–will be the jobs market. As Robert Bach, a senior vice president and chief economist with Grubb & Ellis, notes in the report, 2012 is expected to bring the creation of an estimated 125,000 net new payroll jobs per month in 2012.

All signs point to further success in multifamily. Vacancy levels continue to drop and effective rental rates are on the upswing. The apartment market is expected to continue to thrive for a few reasons, including stringent loan requirements that serve as a roadblock for hopeful homebuyers and the growth in household formation among the 18- to 34-year-old population.

“In most of your markets where you don’t have significant numbers of homes–San Antonio, Texas, is a really good example–what’s driving people into apartments is the simple inability to qualify for the financing to buy a home,” Brown explains. “It’s just gotten that much more difficult and until it changes, it’s going to continue to drive demand for apartment markets.”

It seems nothing could go wrong with multifamily in 2012, nothing within reason, that is. “In terms of something that could cause a hiccup, it would almost have to be something like the population just not growing anymore,” he says. “The reality is that we are growing in population and we’re not building more houses. And people are being moved out of houses at a pretty good clip, and apartments are their natural alternative.”

The scenarios for a major downturn in the apartment sector are not exactly realistic. “If you have some groups that would go out and, say, buy 10,000 homes and then turn all of those into rentals, then you could create some potential competition, but I don’t see that happening,” adds Brown. “It’s fairly difficult to do, and for the most part, that could only really affect markets on a very localized basis.”

With increasingly desirable fundamentals on the horizon, those who can buy, will. Grubb & Ellis’ report includes statistics from the firm’s Investment Opportunity Monitor, a measure of the U.S. metropolitan markets with potential for investors over the next five years. California will be high on buyers’ list. Of the top 10 targeted markets, San Jose-Silicon Valley area is in the lead. San Francisco and Orange County rank four and five, respectively, while Los Angeles, San Diego and the Oakland-East Bay area hold spots six through eight. Boston, New York City, Portland and Washington, D.C. also made the top 10, but investors are looking at secondary markets, too. The year has kicked off with a huge portfolio trade in Louisville, Ky., where Continental Realty Advisors just acquired a 1,200-unit, four-property apartment portfolio from Camden Property Trust for $97 million.

Additional major portfolio purchases are in store. “There will be more, in part for two reasons,” Brown says. “One is that it’s a good market so those people that have a lot of money–whatever fund, REITs or otherwise–to place where they feel fairly secure about the return, are going to be driving for multi-housing. Another thing is that, because rents have started creeping up, sales prices are increasing, approaching $110,000 a unit on average, at the highest price per unit. So what’s happening now is people who have really been stung over the last three or four years and felt the property values drop significantly are realizing that the value has come back up. I think you’re going to see people finally saying, ‘I can now sell my portfolio because I’m no longer going to be losing money.’”

Yet nothing is guaranteed in terms of investor activity in the apartment sector, or any other real estate sector for that matter. “The wild card this year is the unresolved European debt crisis, which has the potential to send lenders and investors to the sidelines,” Bach noted in a prepared statement. “If they stay in the game, expect overall commercial real estate sales to rise 25 percent in 2012.”

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