Apartment Market Looks Strong Going Forward

Chicago–The latest quarterly report by Prudential Real Estate Investors (PREI) on the state of U.S. commercial real estate confirms that the multifamily rental market is in good shape, and that apartment owners have much to look forward to. The outlook for apartments is driven by fairly simple-to-understand economics: Demand is going up, but supply is not.

Other CRE sectors should be so lucky. According to PREI, only the rising demand for hotel rooms is anything like the healthy demand for apartments. Vacancy rates in office and retail properties, by contrast, are likely to remain elevated due to sluggish job growth through next year and into 2012. Those sectors might not see rent increases until 2012, or maybe later.

Meanwhile, demand is already rising for apartments, while supply has fallen to unprecedented low levels, pushing occupancies and rents in a positive direction for the third straight quarter. Citing data by Reis, PREI notes that in 3Q10 net absorption of apartments nationally increased by 84,000 units and vacancy rates dropped to 7.2 percent. At the same time, effective rents grew by 0.6 percent.

“Multifamily properties have been at the leading edge of the recovery due to the short-term leases and the ongoing turmoil in the housing market,” Paul Fiorilla, vice president with PREI Research, tells MHN. “We’ve also seen renewed demand in other sectors with short duration leases, such as hotels and self-storage. The rebound in those sectors could be evidence that the economy and job market in particular are a little stronger than the headline data would suggest.”

Over the longer term, the demand for rental housing is being spurred by favorable demographic trends, such as an ongoing shift into renting as homeownership loses its appeal, at least for now. Moreover, a large number of “echo boomers”—children of the graying baby boomers—are reaching the prime renter age group and beginning to form households. Some older age groups are re-forming households as well. Because the economy will eventually recover, adding jobs, an increase in employment should produce roughly 5 million new renter households over the next five years.

Projected supply over the next five years is a fraction of that. A significant portion of the excess might be absorbed by the rental of single-family homes, PREI posits, but nevertheless demand for new apartment construction will outstrip supply in coming years. These positive forward-looking fundamentals, as well as the availability of debt from the GSEs, have served to increase transaction volume and property values in the apartment sector, and that isn’t likely to change any time soon.