Apartment Market Still Caught in Doldrums
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The single-family home building market appears poised for recovery soon. But it will be at least a year before any meaningful recovery occurs in the multifamily sector of the industry. That was the consensus that emerged from MFE 2009, a conference for apartment executives put on by our sister magazine MFE in Las Vegas last week.
Multifamily production, like single-family construction, is running at very low levels because of excess inventory, both in apartments and in the "shadow" market for single-family rentals. Moreover, depressed rents and high construction costs have led to a big increase in distressed properties largely built in 2006 and 2007.
These depressed properties, many of them sitting with the servicers of CMBS or in the work-out departments of banks, threaten to come on the market within the next year and depress apartment values further. On the rent side, high levels of consumer debt will make it difficult to pass through any rent increases in the next year.
Hessam Nadji, managing director of research services at Marcus & Millichap, a research and brokerage firm, said that while the economic recovery will be good for the industry, "it will be 2011 before we see vacancy rates come down, and we see a recovery in construction.” You can view his complete presentation here.
Meanwhile, the paucity of demand for apartment investments has pushed up cap rates and driven down multifamily values 25 to 40 percent over the last year and a half, according to Linwood Thompson, a senior vice president and managing director with Marcus & Millichap. Though banks and CMBS are dealing with a record number of distressed properties, he doesn't think there will be a big, RTC-like sell off that would further depress prices.
It's hard to make much of government data on apartment starts. Notoriously volatile, starts of apartment projects fell 15.2 percent in September, after rising 20.7 percent the month before.
Developers speaking at the MFE conference clearly indicated that the short-term opportunities aren't in new development as much as buying distressed properties and rehabbing them. It's likely to be a while before the industry can work through the inventory of troubled projects and an incentive to build new ones materializes.