U.S. Apartment Sector Continues to Roll

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The U.S. apartment sector continued its recent run of success with a strong third-quarter performance, as both rental and occupancy rates rose during the period. The good news should keep coming, since the apartment industry appears poised for further growth in 2012.

The market insight was provided by the guests of this week’s “Commercial Real Estate Show,” which took a detailed look at the U.S. multi-family sector.

The national apartment occupancy rate increased by .6 percentage points during the third quarter and now stands at 94.8 percent, according to Jay Parsons, national markets analysis manager at MPF Research a division of RealPage Inc. Furthermore, rental rates rose by 1.6 percent during the quarter.

“We’re starting to get back to the level of average monthly rental rates that we had prior to the recession … ,” Parsons said. “As we go forward, any additional growth is really true growth,” as opposed to market recovery.

The strong occupancy rates are fueled in part by college graduates who are getting jobs and moving into apartments, Parsons said. The trend of people in their late 20s and early 30s deciding to stay put in their apartments and not buy homes is a factor as well, as is the lack of new construction, he added.

Significantly decreased homeownership could benefit the apartment industry for a long while, said Tom Walsh, senior vice president of Grandbridge Real Estate Capital LLC. “I think it’s a paradigm shift,” he said. “People just don’t view that American Dream the way they used to view it, as far as owning your own home.”

Susan Ansel, executive vice president and chief operating officer for Gables Residential, disagreed. “I would not call it a ‘paradigm shift,’” she said. “If you talk to a lot of renters, which we try to do, the American Dream is still alive … . Home prices are low today, and mortgages are inexpensive, and I think that when renters get confidence that home prices are not going to continue to decline, you will see renters moving out to buy homes.”

Gazing into the Crystal Ball

Parsons predicted that the national occupancy rate would improve by half a percentage point in 2012 and that rental rates would grow by approximately 4.5 percent next year.

While some of the guests noted that occupancy rates will likely take a dip in the fourth quarter, as they usually do, Walsh noted that the lack of new apartment deliveries “might offset the normal seasonality.”

Ansel predicted a strong performance for the apartment industry in 2012, but said “the depth of the strength” will be determined by job growth.

Winners and Losers

Some of the strongest performing apartment markets include the San Francisco Bay area; Austin, Texas; Minneapolis; Seattle; Phoenix; and Charlotte, N.C., according to Parsons. Meanwhile, the apartment sector continues to struggle in Las Vegas, Atlanta and Jacksonville, Fla according to MPF Research.

While class A and B properties are doing well, C and D assets are having a harder time, said Jim Jarrell, REO asset manager for TriMont Real Estate Advisors. “We’re seeing a pretty big bifurcation between the A and B assets, and the C and D assets,” he said. “C and D are still having a difficult time of it with the lack of employment for the C and D tenants.”

Future of Foreclosures

While noting that “there are still a healthy number of [apartment] foreclosures,” Jarrell said that “it seems that the number of assets that are being pushed into foreclosure right now is starting to tail off, and we may have seen the peak of the foreclosure market.”

Ernie Eden, vice president of Bull Realty’s Apartment Group, said lenders are continuing to deal with distressed assets. “There are a number of lenders who have not yet made the decision to foreclose,” he said. “Some of them are trying to work with their borrowers … .  We’re going to continue to see some more foreclosure activity, at least in the C and D markets.”

Other discussion topics on the show include capitalization rates and underwriting criteria. The show is available for download here.

Michael Bull, CCIM
Show Host, Commercial Real Estate Show

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