Even Better Times Ahead for Apartment Market: Marcus & Millichap

Whether apartment owners decide to hold on to their properties or or take them to market, this is going to be a good year for them.

Investment specialist Marcus & Millichap’s newly released 2011 National Apartment Report asserts that this year is going to be a good one for apartment owners, whether they hold on to their properties—and thus take advantage of rising occupancies and rents—or take their properties to market to fetch a good price from investors. “All 44 markets in the Marcus & Millichap National Apartment Index will post employment growth, vacancy declines and effective rent gains in 2011, confirming a sweeping recovery and expansion in the U.S. apartment sector above expectations,” the report says.

Much rental and occupancy growth in 2009 and especially 2010 was driven by people obliged to leave owner-occupied housing, as well as households being prevented from buying property due to tight lending standards. Those factors will still be in play in 2011, but added to them will be a resurgent economy. In previous decades, economic growth might have meant more home buying, but attitudes have changed, with apartments seen as a more desirable option than before.

Also helping the apartment market is the fact that the development pipeline for new properties is still small. Indeed, apartment completions will total only 53,000 units this year, 46 percent fewer than delivered in 2010, according to the report. New supply will again fall critically short of demand, which is expected to reach 158,000 units. That means that U.S. apartment vacancy will decrease 110 basis points in 2011 to 5.8 percent, matching the decline recorded in 2010.

“With vacancy in 2011 expected to align closely with pre-recession levels, owners will regain pricing power, particularly in tight core markets,” the report notes. “At the national level, asking rents will rise 3.5 percent to $1,067 per month, while effective rates will increase 4.5 percent to $1,002 per month. Last year, asking and effective rents gained 1.5 percent and 2.3 percent, respectively.”

Naturally, some markets will do better than others, even in good times for the overall market. Healthy employment growth expectations and tight vacancies advanced New York City two places to the number one spot on Marcus & Millchap’s National Apartment Index in 2011, bumping Washington, D.C. to number two. California markets also fared well in the index due to persistent supply constraints that will keep vacancies steady and generate some of the strongest effective rent gain. (Markets are ranked on the index based on their cumulative weighted-average scores for various indicators, including forecast employment growth, vacancy, construction, housing affordability and rents).

Investors looking for apartment properties are going to have a harder time finding deals as more players get into the game, especially REITs, and cap rates continue their compression. The report found that average apartment property cap rates will decline in 2011 after slipping 20 basis points in 2010 to 7.2 percent, led by recompression of the most sought-after deals. Since peaking in 2009, cap rates for top-quality properties have fallen by as much as 100 basis points.

“For top-tier assets the bidding wars continue,” Hessam Nadji, managing director, research and advisory services for Marcus & Millichap, tells MHN. “If the asset has low risk, prospects for outsized rent growth, and is in a supply-constrained location, it’s drawing 20 to 30 offers. We’re starting to see some buyers get out of the market for the absolute best of class assets and look for A minus and B assets since prices and cap rates have become so competitive.”