Apartment Values to Fall a Cumulative 32% from Year-End 2007 to 2010, PPR Forecasts

By Anuradha Kher, Online News Editor Boston–The acceleration of job losses over the past few months has reinforced the idea that the current downturn will be extremely painful, according to Portfolio and Property Research’s (PPR) latest forecast figures. With the national unemployment rate at its highest since the early ’90s, and the housing market still in bad shape, there is no doubt that the recession will be deep, says the real estate research firm. The implications for the apartment market are no less macabre in the near term, PPR’s latest fourth quarter data suggests.Vacancies Will Hit Historic Highs for ApartmentsThis recession will be harder on commercial real estate fundamentals than previous downturns. Apartments vacancies will continue their ascent reaching a record high of approximately 8.5 percent by mid-year 2010. “2009 is set to be the single worst year for market-rate apartments since 1982, when PPR began tracking this sector,” Michael Cohen, research strategist at PPR, tells MHN. Cohen follows and analyzes the state of the U.S. multifamily market. “Fundamentals as well as performance of the apartment market have both taken a big hit. While deterioration in other commercial real estate showed up earlier, it is now fully clear that the apartment industry will not be spared.” Though there were massive declines in the homeownership market, the apartment industry is suffering. There are several other factors for this. “Apartments started off at a higher low than other CRE sectors and there is a strong co-relation between job growth and absorption of market rate units. This is the worst recession since World War II with job losses expected to go up to 5 million, which will have a big impact on apartment demand,” says Cohen. In addition, he says, it is expected that 108,000 apartment units will be delivered in 2009 and the shadow rental market is absorbing a huge chunk of people going into foreclosures or simply not choosing to buy due to the credit conditions. “All this means that 2009 will be a bad year for the apartment industry. In fact, even in 2010 absorption of units is expected to be mildly positive,” says Cohen.In terms of demand, 2009 is expected to be worse than in 2008. Projects underway will continue to deliver this year, but deliveries will be extremely sparse in 2010, allowing markets across the country to catch their breath, despite the softness of demand, according to PPR’s forecast. “All markets, without any exceptions, will see very high vacancy rates by the end of 2009,” adds Cohen. However, through this downturn, the Southwest will lead the nation in terms of supply additions across all property types. After a transitional year in 2010, demand will begin to rebound for apartments.Apartment properties, generally less volatile than other property types, will take the worst beating this time around, with values falling a cumulative 32 percent from the end of 2007 to 2010 before beginning to recover in 2011. While value losses will sting many investors, this repricing will present opportunities as the markets begin to recover, according to PPR. Although apartment properties will suffer the greatest value losses in the near term, they will also post the steepest capital value gains in 2012 and 2013, a cumulative 17 percent, the forecast notes.