SPECIAL REPORT: First Signs that Market is Beginning to Turn Are Appearing

By Erika Schnitzer, Associate EditorLas Vegas—The first signs have appeared that suggest things are starting to get better for the apartment industry, said Greg Willett, vice president of research and analysis for MPF Research, in a National Apartment Association (NAA) Conference and Exposition session entitled “U.S. Apartment Market Outlook.”As Willett noted, the supply picture is the simplest to envision. Completions are slowing; since 2006, quarterly completions averaged about 50,000 units. However, by the last half of 2009, MPF Research predicts that this figure will be reduced to about 30,000 units. And by 2010, only about 20,000 units are predicted to be delivered each quarter.Only some metros currently have any significant amount of product under construction, noted Willett, with Austin having about a 5 percent stock growth based on units under construction, as of April 2009. Charlotte, N.C., Dallas, Las Vegas, San Antonio, Houston, Phoenix, Seattle, Denver and Raleigh, N.C. also are expected to continue to deliver units through the end of 2009. Only Dallas is slated to add anything significant after the end of this year.Willett added that the earliest he expects to see any significant completions for the country as a whole is, at the very least, in 2013.While the supply picture is relatively easy to determine, the demand side is slightly more complicated, mostly due to the rise in unemployment over the past year and the fact that the job market will be a strong indicator for things to come. Before the end of this cycle, between eight and nine millions jobs are expected to be cut.While things in the industry are not too positive, they are also not as bad as predicted, Willett asserted. For example, in the first half of 2009, positive absorption was recorded at roughly 60,000 units. The reasons for this comes from the fact that there has been some bounce back from the shadow market to traditional apartments, as well as a lowered standard of acceptable renters and big rent cuts on apartments. Furthermore, renting has becomes more socially acceptable as single-family homes have continued to be foreclosed.In addition to positive net absorption, occupancy is exceeding expectations. The most recent figures show that that the national average for occupancy is 92.4 percent. While this is down about 0.5 percent year-over-year, the expectation was that it would drop between 1.0 percent and 1.5 percent, explained Willett. And the strongest occupancies are being seen in the Class A- and Class B+ properties built in the 1990s—while the worst-performing properties are those built since 2000, which are seeing 89.3 percent occupancy levels.Willett also noted some of the best- and worst-performing cities in terms of revenue change. Houston, with a +1.8 percent year-over-year revenue change is the top performer, while Seattle, with a -14.4 percent year-over-year revenue change is the worst-performing market. Many California markets are in the bottom-ranking ten, which Willett attributes mostly to big rent corrections, the magnitude and suddenness of job losses and rising home sales. While Willett noted that experts disagree on the timing and velocity of a comeback, he also maintained that most markets will likely hit bottom by the first half of 2010. He predicted that a recovery will be seen between 2011 and 2013—and that it will take at least this long for the job market to recover.Detroit, New York, Chicago and Los Angeles are just some of the larger cities that Willett expects to be slow to recover, while Minneapolis, Atlanta, Denver, Houston, Orlando, Phoenix and Salt Lake City are just some of the markets that should bounce back fairly quickly. San Francisco and San Jose should be the first markets to turn, since the employment correction is less severe and these markets have typically experienced normal rent growth compared to other markets.