The bottom of the single-family housing market is near, and the apartment industry is well positioned for a strong recovery, said Linwood Thompson, managing director of Marcus & Millichap, in his annual Apartment Industry Forecast at the recent Apartment Finance Today Conference.
But the multifamily industry’s recovery likely won’t come until the end of 2010, as the shadow rental market and job losses continue to depress vacancies and rent growth.
An uptick in single-family housing sales in the past month, driven in part by the $8,000 first-time homebuyer tax credit, is a positive first step. “We’re probably close to the bottom, and I think we’re already there,” Thompson said. “The question is, ‘How quick is the climb out of the trough once we hit the bottom?’”
Thompson forecasts the national vacancy rate to rise another 2 percent, approaching 9 percent by the end of 2009. And effective rents will decrease nearly 4 percent nationally, as concessions become the norm in many markets.
The transaction market will remain stalled as the stalemate between buyers and sellers drags on. Owners, who see long-term value in their assets, are not accepting the deep discounts many buyers are expecting. But buyers are emboldened by the short-term pressures in the economy, which are driving apartment values down.
“The short-term crowd thinks they’ll be able to buy 50 cents on the dollar without risk,” Thompson said. “But for deep discounts, they’ll find it’s a relatively risky environment.”
More distressed assets, especially those financed through aggressive commercial mortgage-backed securities (CMBS) loans, should start to trickle into the market in the second half of 2009. But unlike the days of the Resolution Trust Corp. (RTC)—a government program in the early 1990s that sold off troubled properties after the Savings & Loan scandal—these distressed assets will take a while to hit the market, since they feature more complex capital stacks than those the RTC handled.
Values will take a beating for the foreseeable future. Cap rates for Class A assets in primary markets have seen a decline of 65 basis points (bps) in the past 15 months, while C-class assets in secondary markets have declined 150 bps in that time. Cap rates should decline another 50 bps on average by the end of 2009, Thompson predicts.
“The price to clear the market is a 20 [percent] to 25 percent discount, and sellers aren’t accepting that,” Thompson said.
There are some silver linings, though. Demographics, led by the echo boomers and increasing immigration, favor the multifamily industry’s long-term health. And there will be fewer units to house these populations, considering that the industry added just 1 percent of new product annually in the past decade, and construction starts are so low now.
“Even as we see high levels of future demand coming, supply will be more difficult and expensive to deliver,” Thompson said. And the future of multifamily production will be characterized by a shift into city centers. “Urbanism and density are the trends that are going to shape the next 30 years,” he predicted.
In all, while 2009 and 2010 will be rough, “when the dust settles and we come out of this, multifamily will be very solid,” Thompson added.
For a copy of Thompson’s presentation, which includes a wealth of market-specific and national data, visit www.aptfinanceconf.com.