Apartment Fundamentals Attracting New Waves of Investors

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The latest quarterly report by Apartment Realty Advisors on the direction of key indicators in 29 U.S. metro apartment markets shows some movements in some places-

Dees Stribling, Contributing Editor

Atlanta–The latest quarterly report by Apartment Realty Advisors on the direction of key indicators in 29 U.S. metro apartment markets shows some movements in some places–including an uptick in effective rents in 10 markets and increasing occupancies in 12 during the first quarter of this year, compared with 4Q09. Atlanta-based ARA notes that these early 2010 movements probably portend that more interested buyers for apartment properties will materialize in the near future.

Effective rents were up during 1Q10 in Austin, Boston, Denver, Ft. Myers/Naples, Houston, Kansas City, Raleigh/Durham, Sacramento, Salt Lake City and San Francisco. Effective rents moved downward in seven markets: Dallas, Jacksonville, Orlando, Providence, Portland, Ore., Seattle and Tampa. Everywhere else–Atlanta; Boca Raton; Charlotte, N.C.; Chicago; Cincinnati; Columbus, Ohio; Dayton, Ohio; Indianapolis; Manchester, N.H.; Nashville; Phoenix; and Savannah/Augusta–experienced no appreciable change in effective rents.

A fair number of markets saw occupancies increase during the first quarter as well, though it wasn’t a precise match with those experiencing higher effective rents. Austin, Boca Raton, Boston, Denver, Ft. Myers/Naples, Houston, Kansas City, Orlando, Raleigh/Durham, Salt lake City, Savannah/Augusta, Tampa enjoyed higher occupancies during 1Q10, according to ARA.

Besides effective rents and occupancies, the ARA report also tracks movement in cap rates and new construction. Cap rates were down almost everywhere, with a handful of markets unchanged, and there was almost no upward movement in construction (only Boston recorded increased construction).

ARA chairman Gary Kachadurian posits that the downward pressure on cap rates is due to heightened investor interest in apartment properties–many investors with war chests chasing not so many properties for sale. Moreover, he predicts that the competition for properties will become even more keen as the year continues.

Who’s buying? (Or rather, who wants to buy?) “High-net-worth buyers continue to dominate the buyer profile,” Kachadurian tells MHN. “However, they’re having to accept lower initial cash yields as cap rates have fallen and net operating incomes haven’t risen accordingly. Class A and Class B+ properties are still generating at least 25 offers–and sometimes many more–especially in first-tier cities.”

But that’s not the whole story. Institutional investors are returning to the acquisition market, albeit very slowly, Kachadurian adds. “Though cap rates have fallen, they see it as an opportunity to buy high-quality assets at substantially below replacement cost,” he explains. “They also understand that apartments produce the highest risk-adjusted returns of any real estate product type, and that the demographics, namely echo boomers, coupled with the dearth of new construction, will make the next 12 to 18 months a great time to buy good properties.”

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