Multifamily Market Could Soar to New Heights

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The multi-family segment looks like a rockstar in the commercial real estate market, with another stellar performance in second quarter and a growing fan club of investors.

The “Commercial Real Estate Show” this week interviewed experts from the multi-family sector for insights into why this market segment continues to be one of the top performers in commercial real estate. We also revealed some very impressive second quarter statistics.

The multi-family market nationwide showed quarterly revenue growth of 2.4 percent, with occupancy soaring to 94.2 percent and effective rents bumping up 1.7 percent, according to MPF Research, a division of RealPage Inc. And the sector shows no signs of slowing down.

“Pricing can go to new highs as long as the occupancy is there to support the increases,” Greg Willett, vice president of research and analysis at MPF Research. “At this point, it is starting to look like that is the case.”

Revenues are projected to rise about 6 percent this year, with another 6 percent increase in 2012, Willett said. There hasn’t been growth like this since the dot-com era in 2000 and early 2001, he said.

So what’s driving this impressive demand for apartment living?

Many factors are fueling demand, starting with the demographic surge of 20 to 34-year-olds, who are typically renters. This increasing population also has absorbed most of the job growth during the economic recovery.

Meanwhile, very few renters are leaving the mulit-family market to buy homes due to weak job security and a shaky housing market. This means that new tenants typically boost the already impressive occupancy rates since existing tenants are not moving out, Willett explained.

These market dynamics have developers rushing to provide new product. New multi-family construction projects are in the pipeline, but most won’t be available until late 2012 or early 2013 so vacancies continue to shrink, says Doug Culkin, president of the National Apartment Association.

Sales velocity is rising, as investors are also flocking to the party.

“We are seeing lots more calls, emails, showings and people looking for property,” said Ernie Eden, senior vice president of The Apartment Group at Bull Realty. “We are seeing people coming out of the stock market into apartments and coming out of other types of commercial real estate into apartments.”

Cap rates in markets with high barriers to entry, such as Southern California and Washington D.C., are as low as 4 percent and hover around 5 to 6 percent in the rest of the country, said experts.

Of course, the multi-family segment still has some rough spots. Places like Las Vegas and Southern California have been especially hard-hit by job losses — a major blow to the owners of B and C properties in those areas.

At the other end of spectrum, student housing is sizzling. It’s the fastest-growing niche market in multi-family.

“Universities are getting out of housing because they don't know how to manage housing and make money,” Culkin said. “It’s a hot market, it's a great market.”

Overall, the multi-family sector is projected to remain very strong, said Jerry Wilkinson, 2011 chairman of the National Apartment Association.

“I think we have a two-year run,” said Wilkinson, founder and chairman of Wilkinson Companies. “I think cap rates will remain relatively flat subject to any unusual interest rates. I think it’s going to take some time to produce new product and that product is going to be located in core areas with significant replacement costs.”

This show provided a very interesting and insightful update on the multi-family market and its impressive post-recession performance. If you haven’t heard it already, the show is available for download here.

The next “Commercial Real Estate Show” will air July 23, offering an inside look at the land and development industry. Tune in to catch second quarter statistics, find out the latest market trends and get a preview of what’s going to be hot in the coming year.

It will be available for download at www.commercialrealestateshow.com.

Michael Bull, CCIM
Show Host, Commercial Real Estate Show
RadioShow@BullRealty.com

President, Bull Realty, Inc
800-408-2855 ext 2001