Demand for Apartments Expected to Bottom Out This Year

By Anuradha Kher, Online News EditorBoston–Demand for commercial real estate is expected to hit rock bottom this year with the apartment sector enduring the lightest demand loss in 2009 of all the commercial property types. However, that’s not saying much, as this will still be the heaviest loss in apartment demand in 25 years (Graph 1), according to the first quarter 2009 forecast report from Property and Portfolio Research Inc. (PPR). Although there has been much debate over what “mark-to-market” really means in this unprecedented environment, owners cannot ignore their falling income streams. Cumulative NOI losses will be in the double digits for all four major property types, and these declines will induce heavy value losses, according to PPR.In fact, the cumulative value loss in each property type will be at least 30 percent and will be far worse than in the previous two recessions (Graph 2). As the market responds to the huge inflation in values over the past few years, the apartment sector is expected to narrowly edge out the other property types for the worst value losses.Supply underway is at a 17-year-low. Multifamily starts for the month of March have fallen 42 percent from February 2009 and 55 percent compared year-on-year. “From the supply side, this is exactly what we wanted,” Tobey Price Hubbard , managing principal at Blackstar Capital Partners, tells MHN. “In fact, I would be concerned if the number was higher than what we had expected. “We haven’t seen an increase in demand yet, so it would be concerning if these numbers were higher. Demand has to lead the way. When unemployment and other fundamentals of the economy return to normal and the sky-is-falling outlook goes away, those who do have supply,” will do well, says Hubbard.With the nation expected to begin recovering next year (fueling some positive demand), vacancies will peak in the apartment sector in 2010. Though the recovery will differ metro to metro, PPR projects vacancies will generally cycle back down over the remainder of the forecast (Graph 3).