MARKET SNAPSHOT: 2012 Predictions Indicate that Class B Product Will Play Bigger Role

Dallas, Texas—The multi-housing sector continues to be in the best shape of all real estate, affirmed panelists at a webinar, hosted by Humphreys & Partners Architects LP, yesterday.

At the presentation, “2012 Kick-Off Webinar for Apartment Development,” Greg Willett, vice president, Research & Analysis-MPF Research, highlighted some fourth-quarter numbers.

For the year ahead, he noted, “there are some vulnerabilities still out there and we don’t want to ignore those, but the outlook and worst-case scenario is good and the best-case is spectacular.”

He predicts that the revenue change for the year ahead to be 5 percent, with the majority stemming from rent growth (4.5 percent).

For the 64 largest markets, average occupancy at the end of the year was 94.6 percent, up 1.1 percent on an annual basis and 3 percent since the market hit bottom in 2009. In 2011,193,000 units were absorbed, while only 56,000 units were delivered. Willett added, however, that a large part of these new units was niche product.

The strongest markets (with at least 100,000 units) in terms of occupancy were: Pittsburgh (97.8 percent), New York (97.4 percent), Minneapolis (97.1 percent), San Jose (96.9 percent), Boston (96.8 percent), San Diego (96.8 percent), San Francisco (96.6 percent), Miami (96.3 percent), Northern New Jersey (96.2 percent), Oakland (96.2 percent), Los Angeles (96.0 percent) and Portland (96.0 percent).

The weakest markets in terms of occupancy were Phoenix (91.7 percent), Indianapolis (91.7 percent), Houston (91.5 percent), Atlanta (91.3 percent) and Las Vegas (91.2 percent).

Meanwhile, the average annual in effective rent growth was 4.7 percent. The top performing metros for rent growth were San Francisco (14. 6 percent), San Jose (12.3 percent), Oakland (9.0 percent), Boston (8.3 percent), New York (7.3 percent), Austin (7.2 percent), Pittsburgh (6.8 percent), Denver (6.7 percent), Seattle (5.9 percent), Charlotte (5.8 percent), Chicago (5.8 percent) and Minneapolis (5.8 percent).

Only two large metros showed rent growth of less than 2 percent: Virginia Beach (0.6 percent) and Las Vegas (-0.4 percent), added Willett.

With a slowdown in the fourth quarter due to seasonality, occupancy decreased only 20 bps during this period, with rents increasing 0.2 percent. Revenues for the fourth quarter remained where they were as of the third quarter.

Doug Bibby, president, National Multi-Housing Council, noted that not only are multifamily developers eagerly buying land and filling development pipelines, but also many single-family businesses are looking at the multifamily sector, as this product type continues to be weak.

Opportunities in the sector, he added, continue to be the favorable demographics, an increase in household formation and continued immigration. Additionally, the jobs that are being created are heavily oriented toward the service sectors, and are somewhat low-paying—a sweet spot for the rental community.

“The middle-market product will play a bigger role than it has in the past,” asserted Willett, point out that people may be forced to move down the quality chain as rents increase in the top-tier assets. Additionally, he asserted that operators need to pay better attention to renewal rates.

“The gap in pricing between renewal leases and those for new residents is the key number that operators need to pay close attention to,” he noted..

In terms of where these renters want to live, the urban environment is still stressed, with opportunities being in core, infill, mixed-use, mixed-income and redevelopment product types.

While there has some activity in Congress, Bibby predicts that there won’t be any real legislative changes in terms of housing finance or the GSEs until after the election later this year.

And speaking of finance, the situation is similar, in some respects, to last year, noted Mark Humphreys, CEO, Humphreys & Partners Architects LP. Equity players are focused on the strength of the sponsor. Additionally, there are many lenders that appear ready to jump back into construction financing—in urban markets.