SPECIAL REPORT: Modest Recovery Will Take Place in Apartment Market from 2011 to 2013

By Anuradha Kher, Online News EditorDallas—“Last year the apartment markets looked fuzzy, and this year, it’s still a fuzzy picture,” Greg Willet, VP of research at MPF YieldStar, said at a session titled “U.S. Apartment Markets Outlook” at the RealPage User Conference held from July 13 to 14 in Dallas. “There is a lot happening; there’s a lot of contradictory data and things are moving in different directions. While the economy is still deteriorating, we are seeing signs that things are going to be okay. The apartment market is still on the downward slope, and recovery depends on what happens in the economy.”Willet then outlined the supply and demand outlook based on data for the 64 metros YieldStar is monitoring.Supply outlook: The past few years, for the nation as a whole, the apartment industry has tended to deliver about 50,000 new units every quarter. The middle of this year marks the end of that phase. At the beginning of the third quarter this year, deliveries will be down to 40,000 units and 30,000 by end of the fourth quarter. Next year, this number is expected to drop down to 20,000 units. The 10 most active markets in terms of how their inventory is expected to grow: 1.       Austin—5 percent over next year2.       Charlotte3.       Dallas4.       Las Vegas5.       Houston 6.       Phoenix7.       San Antonio 8.       Seattle9.       Denver10.     Raleigh Everywhere in the country, there is minimal ongoing construction, and that situation will continue for a while. By 2010, the only exception will be Dallas, which will deliver 8,000 units. “Access to capital is a big problem, but past that, the challenge is that we have cut rents so significantly and no new development deals are going to pencil out at the rents we are getting. We think it’s going to be a while till we see some meaningful starts. Realistically, it’s going to be 2013,” said Willet. Demand Outlook: “It’s a much more complicated story, with several factors playing a role,” said Willet. What happens in the job market is the biggest question. Since the recession began, the country has cut more than 6 million jobs. It is a long way to go before there is any upturn in the job market. Most economists agree that somewhere between 2 to 3 million more jobs will be cut.The second factor is that renters were lost last year to the shadow market. But now those properties are being foreclosed on so those people are returning to the apartment market from the shadow market. Florida is an example of that. The third factor is that for many apartment companies, anybody is better than nobody, which means that companies have lowered standards on who is an acceptable candidate. “Lastly, rents have been cut so much that we are buying demand,” said Willet.Other findings Willet outlined are:1.       Newly developed product has the highest vacancy, which means there is a long way to go until they achieve healthy occupancy rates.2.       During a recession, people are supposed to double up, which means there should be higher occupancy in the two- and three-bedroom units, but that is not the case. This shows that while there is doubling up, the apartment market is also losing people to the single-family shadow market.3.       2008 was “about” what happened with occupancy, but 2009 is about what will happen with rents. Effective rent was down 3 percent in the middle of the year for the nation as a whole. Willet revealed that there are markets that are doing well, some that are in the middle and other that are at the bottom.A handful of markets which have positive revenues tend to be very small markets. Dayton, Louisville, El Paso, Ft. Myers, Pittsburg and Oklahoma City all have positive revenues. Even though they are losing jobs, they haven’t lost a lot of jobs. “Also, in the upcycle their single-family product did not get overbuilt so they don’t have a shadow market,” said Willet. Houston is basically flat on revenue basis, and Washington, D.C., Philadelphia and Boston are performing satisfactorily.In the middle are Florida markets including West Palm Beach, Orlando, Ft. Lauderdale and Tampa, which are getting some bounce back from the condo shadow market. Occupancy is getting close to stabilizing in these markets, but they are still undergoing rent cuts. San Francisco and San Diego, which are different from the rest of California, as well as Midwest markets including Chicago, Minneapolis and Detroit are also somewhere in the middle. The markets that are the very bottom are almost all the California markets with the exception of San Diego and San Francisco; Seattle; New York; and New Jersey.Willet said that the apartment industry on a national basis will hit the bottom in mid-2010. “For overall U.S., revenues will come down a little bit more, maybe somewhere around 2 percent, rents will be cut more and real recovery will take place between 2011 to 2013.” It is important to note that there are some unrealistic expectations about the comeback in 2011, said Willet. And even with recovery in process, there will be laggard markets in 2011-2013. Detroit, Cincinnati, Dayton, Louisville, St Louis, New York, Chicago, Los Angeles and Orange County will lag behind, and there will be notable momentum in Minneapolis, Atlanta, Houston, Orlando, Phoenix, Salt Lake City, San Francisco and San Jose, which will jump to the top of the list, according to Willet.