Apartment Market to Go Gangbusters in 2011

Reports from NMHC and Marcus & Millichap predict the course of the market this year, and it's mostly good news for owners and investors.

The apartment market may be on the upswing, but can its growth continue into 2011? Two reports released this week, one from the National Multi Housing Council, another from investment specialist Marcus & Millichap, help quantify the upswing in 2010 and predict the course of the market this year, and it’s mostly good news for owners and investors.

According to the NMHC’s latest Quarterly Survey of Apartment Market Conditions, 60 percent of respondents say that markets were tighter during 4Q10 than three months earlier–that is, experiencing lower vacancies or higher rents or both than during the third quarter. At the beginning of 2011, the organization’s Market Tightness Index recorded its second-highest January reading on record at 78. (A reading above 50 indicates improving market conditions.)

The NMHC attributes the tightness to a drop in demand for homeownership, which has concurrently spurred demand for apartments against a backdrop of the lowest apartment starts in 40 years, barely enough to offset the units lost to demolition and obsolescence. The organization posits that the tightness trend will continue through 2011.

Strong apartment market fundamentals are bringing investors out of the woodwork. The NMHC’s Equity Financing Index rose to a record high of 74 at the end of 2010, with the highest percentage ever of respondents (52 percent) saying they had greater access to equity capital in the past three months than previously. Sales volume also remains strong, with an Index score of 62, the sixth consecutive quarter it has remained above 50.

The good times for owners and investors won’t last forever, however–just for a good while longer. “While the apartment sector outperformed the overall economy in 2010,” says NMHC chief economist Mark Obrinsky in a statement, “that can’t continue indefinitely. [Still], the consensus forecast is for moderate economic growth this year, which should provide additional support to the apartment market.”

Marcus & Millichap Real Estate Investment Services’ 2011 National Apartment Report generally agrees that apartment fundamentals are good and getting better. Absorption of multifamily units increased significantly in 2010 due to the release of pent-up renter demand as renter households “de-bundled” (moved out of their parents’ or relatives’ or friends’ homes) in the wake of the recession, the report says.

All 44 of the markets surveyed in the report are expected to post employment growth, vacancy declines and effective rent gains in 2011. The markets of New York City, Washington, D.C., and Boston, which are particularly supply constrained, earned top spots in the report’s National Apartment Index (NAI), a snapshot analysis that ranks all the markets based on supply and demand variables, including forecast employment growth, vacancy construction, housing affordability and rents. Detroit, Las Vegas and Jacksonville ranked at the bottom of the NAI.

Although debt availability has increased substantially last year, Fannie Mae and Freddie Mac still dominated the market, providing apartment investors an advantage over other property types that is expected to continue for a while. Multifamily investment sales and pricing in primary markets will increase again this year, according to the report. Pricing for assets in A locations turned aggressive in 2010, leapfrogging property fundamentals. REITs and institutions were responsible for much of this activity in the $20-plus million range, which placed downward pressure on cap rates and upward pressure on prices per unit.

“Institutional investment capital has started to move toward Class B and secondary markets,” Hessam Nadji, managing director, research and advisory services at Marcus & Millichap, notes in a statement. “This emerging trend is based on cap rate re-compression of 125 to 150 bps for top-tier assets in primary markets during the past 18 months. As the economy and investor confidence improve further, investors will increasingly look at these Class B assets and better secondary locations in search of yield. Development is also on the horizon in many metros, but supply will fall short of demand for at least the next few years.”