Surge in Confidence Puts Investors on the Hunt, Particularly for Multifamily

Encino, Calif.–What a difference a year makes. Twelve months ago, real estate players with money in pocket were hesitant about making purchases, but now confidence is on the upswing and they have become increasingly acquisitive, as per a third-quarter report by National Real Estate Investor magazine and Marcus & Millichap Real Estate Investment Services.

The report, the Third-Quarter 2010 Real Estate Investment Outlook, is based on NREI and Marcus & Millichap’s Investor Sentiment Index, a tool that the partners established in 2004 to track investor confidence. The numbers tell the story. Last year the index hit a low of 91, but 2010 has brought consistent improvement, pushing the index up to 119 at present. The glory days, which were at their best in 2005 when the index soared to 148, have not returned, but according to the report, the current figure indicates that the worst is over.

The boost in confidence is evident in transaction activity. From mid-year 2009 to mid-year 2010, transactions increased 54 percent to $111 billion. And it was the multifamily sector that led the charge.

With the average vacancy rate having dropped 20 basis points, to 7.8 percent, by the end of the second quarter, the apartment market has become progressively more attractive to buyers—more attractive than most other commercial real estate sectors. Approximately 55 percent of those surveyed for the report say the market is ripe for snapping up apartment properties, while only 32 percent believe now is the time to buy retail and 26 percent are keen on hotel and mixed-use assets.

The emergence of multifamily as the investor flavor of the year comes as no surprise to Marcus & Millichap. “Traditionally, you would expect apartments to see recovery first because the leases are short-term and as the economy picks up, people rent more; that has been the classic recovery pattern for many, many cycles,” Hessam Nadji, managing director, research and advisory services at Marcus & Millichap, tells MHN.

While the apartment market is following typical patterns, there is one factor that is not so typical. “Not only did the market recover first, it recovered at breakneck speed,” Nadji says. “It was the strongest upsurge pace we’ve seen in over 10 years. The recovery of apartments is way ahead of job growth, which is what normally spurs absorption.”

The reason for the speedy recovery is threefold. For one, renters who doubled-up in apartments when the economy and jobs market took a nosedive are moving back out, and the typical resident turnover rates are down as renters are extending their stay in apartments for a longer-than-usual period of time. Finally, one obstacle that had been preventing the creation of new households is slowly being removed. “We did add over 1 million private sector jobs this year,” Nadji notes. “It’s not a lot; it’s only moderate job growth, but it generated new household formations.”

Be it an apartment, retail or hotel purchase, investors are only growing more enthusiastic. Approximately 61 percent of survey participants noted that they are planning to boost their acquisitions over the next 12 months. However, a return to the halcyon days of 2005 is not yet within sight. “There will be more pickup, but we don’t anticipate hitting those levels in the next two or three yeas,” Nadji says. “We’re no longer in economic free-fall, but it’s not a straight line recovery. It’s going to be very bumpy. We will continue to see improving sentiment, but not at the same pace. There has been a radical reaction to things leveling off. We don’t expect it to continue at the same pace, but it will continue.”