U.S. Apartment Market Continues to Roll

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The U.S. apartment market has performed spectacularly in recent years, and the sector will continue to roll in the years ahead as “Echo Boomers” enter the workforce.

My guests on the “Commercial Real Estate Show” shared those observations and others in a wide-ranging update on the market. Topics included occupancy rates, rent growth, future development locations and a “game-changing” way of setting rents.

Ronald G. Johnsey, President, AxioMetrics, Inc

The overall national apartment occupancy rate was 93.5 percent in 2011, said Ronald G. Johnsey, president of AxioMetrics Inc. The 2012 rate should climb to 95 percent, he predicted. Apartment rents grew by 4.1 percent last year, and are expected to grow by 5.5 percent in 2012, Johnsey added.

Class C apartments have lagged slightly in occupancy when compared to Class A and B, but “this is the year we’re going to fill in Class C,” Johnsey said. “We’re going to see the occupancy rates in all classes get closer to 95 percent, and that’s going to create really strong pricing power.”

The entrance of Echo Boomers – those born in the 1980s and early 90s – into the rental pool is another reason why Johnsey is predicting a long-term bull market for the sector. Echo Boomers are getting married later and often carry significant college debt – two factors that decrease their likelihood of buying a home in the near future, he noted.

Members of this demographic “are not at this point interested in the American Dream,” said Chris Burns, president of the Atlanta Apartment Association and a regional vice president with Lincoln Property Co. “They like the socialization and the flexible lifestyle afforded by apartments.”

Location, Location, Location

Doug Culkin, president of the National Apartment Association, said new development should start to pick up noticeably in 2013 and 2014. Apartment developers are not only seeking land on the ever-popular East and West Coasts, but also in college towns, where demand is being created in part by empty nesters “looking for culture,” Culkin said.  

Ernie Eden, VP, The Apartment Group, Bull Realty

Developers have made “a real move to quality” when it comes to locations, said Ernie Eden, a senior vice president in Bull Realty’s Apartment Group. “If you’ve got a great location, there’s all sorts of interest on the part of developers,” especially if the site is in an infill area of a large city, he added.

Burns said financing for new development is readily available “if you have good equity, a good location, a good story and good sponsors involved.”

“A good sponsor is really important,” I replied. “We’ve gone back to those days – which we should.”

The strongest performing apartment markets currently include Northern California; Boston; Washington D.C.; southeast Florida; Dallas; Austin, Texas; Minneapolis and even Pittsburgh, guests said.

A Game Changer

Revenue-management software – which sets the rent for a unit using sophisticated algorithms that take into account everything from seasonal demand to the economy – “has become the game changer in the apartment industry,” Burns said.

By taking human nature out of the rent-setting process, apartments can take in more revenue, Burns said. Lincoln properties that have instituted the pricing system have seen up to 8 percent increases in revenue, he noted. Hotels and airlines use similar systems to set prices.

“That’s amazing that you can get that much better performance out of that system,” I noted.

The use of revenue-management pricing is one reason why apartment REITs have performed so well recently, Johnsey noted. Over the past two years, they have raised their rents by 10.4 percent while the industry as a whole has raised rents by 8.5 percent.

Other topics we discussed include cap rates, loan maturities, popular site amenities and the brisk pace of investment sales.

To learn more about the U.S. apartment market, listen to the entire show, which is available for download here.

Michael Bull, CCIM
Show Host, Commercial Real Estate Show
Info@CREshow.com

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