Outlook Bright for Multifamily Housing In 2006, Analyst Predicts
By Caitlin Jones & A. J. Johnson
4 min read
Tax Credit Advisor January 2006: The outlook for multifamily housing is bright in 2006, according to Greg Willett, Vice President, Research and Analysis, at Carrolton, Tex.-based M/PF YieldStar.
“The nation’s apartment fundamentals continued to improve, and we ended 2005 in by far the best position seen in five years,” he said. “Look for solid apartment demand over the coming year.”
Willett said that preliminary results for apartment occupancy point to a 1.6 percentage point increase between the end of 2004 and 2005, to 95.2 percent. Achieved rents, meanwhile, rose by 4.1 percent in the fourth quarter of 2005.
Both supply and demand in 2005 bode well for an improved outlook this year, he said. Demand increased last year as the economy continued to improve, creating more jobs, and as fewer renters left their apartments to make first-time home purchases. On the supply side, the delivery of new apartments in most cities was well below the rate of apartment absorption.
Continued Improvement in 2006
Willett said that he expects the favorable trends established last year to continue in 2006. The economy will remain strong, he said, providing support for the new job creation that drives housing demand. Supply this year will also be favorable, with scheduled completions at “moderate levels almost everywhere.”
“The anticipated trends in demand and supply suggest that U.S. apartment occupancy should edge up a little further during 2006, perhaps rising by about a half a percentage point,” he said.
The “real action” this year, Willett stressed, will be the opportunity apartment owners have to raise rents.
Increased rents are viable because home prices have soared while rents have risen only moderately. “The premium to buy versus rent is way above the historical norm, even with mortgage rates at relatively attractive levels,” he said.
In addition, apartment owners have generally not yet raised rents to levels that are commensurate with recent occupancy levels. “Those operators who have been more aggressive in boosting rents generally have proven that realistically achievable dollars have been left sitting on the table,” he said.
Raising rents is critically important in many cities, said Willett, in order to nudge new apartment construction volumes back to appropriate levels. “It’s harder and harder to get new construction deals to pencil out at today’s rents, especially after a huge run-up in the cost of construction materials over the past year and a continuing increase in fees charged by many individual municipalities,” he said.
A Possible Problem Area
One factor that is cause for concern in 2006, the researcher said, is the torrid pace of new condo delivery, which will affect the apartment market in two ways. First it will slow down the conversion of rental units into condos. Secondly because so many investors, rather than owner-occupants, are buying condos, a “shadow market of units offered for lease by individuals” will emerge, Willett said.
A Survey of Regional Markets
Surveying regional markets in 2006, M/PF YieldStar grouped cities into three categories of expected performance, ranging from Grade A to Grade C (See chart). Current performance scores count for one-third of the grade, with near-term momentum the remaining two-thirds.
Fort Lauderdale is the top rated metro for 2006, with strong employment and a low level of inventory growth. Also in the A category are Denver, Austin, Phoenix, Houston, Raleigh, San Francisco and Oakland, all of which featured strong rent growth. Albuquerque, El Paso, Tucson, Birmingham, and Memphis also received high marks for limited inventory growth.
Several A performers from 2005, however, have slipped to the B category, including Orange County, Norfolk, San Diego, Tampa, and Baltimore. On the other hand there were many cities in the B category where apartment performance is improving. These include: Philadelphia, Chicago, Tulsa, San Jose, Seattle, Charlotte, Richmond, Sacramento, Oklahoma City, Jacksonville, Pittsburgh, and Nashville. Willett identified eight cities in The B category that are poised for an upturn: Kansas City, St. Louis, Indianapolis, Salt Lake City, Portland, Louisville, Dallas/Fort Worth, and Minneapolis.
The C category is dominated by cities that are traditionally poor performers, mostly in the Midwest, including Cincinnati, Dayton, Columbus, Detroit, Cleveland, and Greensboro, N.C. There are also some special situations in this category, including Northern New Jersey, were operators “absolutely refuse to raise rents, even with all indicators saying they should.” Boston and San Antonio are problematic because of their extremely high level of apartment construction.
Willet characterized Atlanta as a “wild card,” with recent new job growth a positive, while negatives include layoffs from employers like Delta Airlines and aggressive construction of both for-sale housing and rental apartments.
