1. Washington, D.C./Baltimore
No surprise here. In fact, it may be tough to really put the Washington, D.C., metro area on a list of improving markets since it’s basically paced the apartment business over the past couple of years. Marcus & Millichap, for instance, named Washington its top market in 2009 and expects a repeat in 2010 with rents expected to improve 20 basis points to 6.5 percent. The primary reason for this is simple: The government remains a strong employment driver.
If the private sector follows suits and also adds jobs (Marcus & Millichap anticipates 35,000 new jobs in the metro in 2010), things could get even better. “We do think that they [Washington, D.C., apartment owners] will do a little better in calendar 2010 than they did in 2009,” says Greg Willett, vice president of research and analysis for Carrollton, Texas-based M/PF Yieldstar. “It is our No. 1 choice for revenue growth for next year.”
There has been some construction in the market, with 5,700 units delivered in 2009, and Marcus & Millichap expects to see 4,750 units in 2010, putting the D.C. area at third (behind Houston and Dallas) in 2010 completions. But Willet doesn’t think that has been hurting the market. “They have had construction,” he says. “It has just leased pretty well. They have healthy occupancy, and they haven’t really cut rents much.”
2. San Diego
Last year Marcus & Millichap ranked San Diego at No. 6 on its National Apartment Index. This year, it’s jumped four spots to No. 2. Like Washington, D.C., the government will drive a lot of demand, pushing demand up a full percentage point in 2010, as Marcus & Millichap forecasts the metro will add an additional 12,500 jobs.
But that’s only part of the story. Only 541 new units were delivered last year with 1,100 more expected to follow in 2010. “They have had a lack of supply,” says Sarah Bridge, owner of RealFacts. “That would suggest their market will recover faster.”
Marcus & Millichap says that should push vacancies 20 basis points lower in 2010 to 5.4 percent and asking rents up 0.2 percent to $1,308 per month. “That is a story of occupancies in pretty good shape and really no new supply,” Willet says. “While the economy has taken a hit, they’ve been doing better than the nation as whole and it [San Diego] is forecasted to be one of the leaders in the recovery."
3. San Antonio
You may notice a theme. Washington, D.C., is the base of the federal government. San Diego has robust demand from local military and naval concentrations. And so does San Antonio. While not everyone is ready to put Alamo City in their top 10 or top five markets, it does have its fans. “It’s gotten beat up in the last year or two, but the job losses are not that meaningful thus far,” Willet says. “Because the military is bringing 12,000 additional jobs over the next year and very little supply, there’s probably a big move in occupancy San Antonio in 2010. Rents should get back into positive territory.”
There are other drivers as well. Marcus & Millichap projects that the city will gain 22,000 jobs in the metro, a 2.6 percent gain, in 2010. “It continues to emerge as a call center hub and a very efficient place to do business,” says Ron Witten, president of Witten Advisors.
Marcus & Millichap projects that San Antonio will boast flat asking rents and falling vacancy this year, putting it at the No. 12 spot on its national list. There are projected to be about 2,000 new completions in the city, but Marcus & Millichap projects that job and population growth will improve vacancy 50 basis points this year to 10.4 percent. In 2009, rents will stay flat at about $685 per month (though effective rents could slip 0.6 percent to $632 per month).
4. South Florida
South Florida has been the poster child for the housing bust for a number of years now, but many analysts and REITs think things are improving significantly. That may mean as little as putting the brakes of stunning rent declines. But in this economy, that’s enough to out South Florida on a list of most improved markets for 2010.
Nowhere has South Florida’s improvement been more noticeable than the recent fourth-quarter REIT conference calls. Denver-based AIMCO said that over the past 30 days it has seen rate increases in Florida. Chicago-based Equity Residential, another large apartment owner, said the market is at 94.8 percent occupied and mentioned it alongside solid performers Boston and Washington, D.C., as its top performers. And Witten agrees. “Parts of South Florida are on the list [of most improving markets for sure,” he says.
Still, there are challenges. Marcus & Millichap, which puts Miami at No. 25 on its index, projects employers will cut 3,000 jobs this year (a 0.3 percent decline but an improvement from 2009) in Miami-Dade County. Only 500 new units will come online this year, but unsold condos provide stiff rental competition. Vacancies should rise 50 basis points, which is a major drop from last year’s 130 basis points, and asking rents are projected to fall 3 percent to $1,010 per month, according to Marcus & Millichap.
5. New York
Everyone knows the Big Apple was hurting when the credit crisis hit in 2008. But many of those same financial firms that shed jobs are hiring again, with Marcus & Millichap projecting that 29,000 jobs will be added in New York in 2010. That should make 2010 better for apartment owners than 2009 was.
“New York is one city where we are seeing some job stabilization and recovery,” said Equity’s CEO David Neithercut in the company’s fourth-quarter 2009 conference call, which was transcribed by Seeking Alpha. “Anecdotally, our people in New York were telling me just recently that all of the big houses—J.P. Morgan and Goldman Sachs—are hiring. We’ve got a number of new leases just recently both in Manhattan and over in Jersey”
While vacancies rose 120 basis points last year, they’re expected to decline 10 basis points to 3.4 percent in 2010. Equity announced that it underwrote 3 percent revenue declines in properties it recently bought in the market, but expects things to improve going forward.
Still, asking rents are expected to drop 1.5 percent to $2,647 per month in 2010 and effective rents should drop 2.5 percent to $2,506 per month. Last year, asking and effective rents fell 6.6 percent and 8.1 percent, respectively, according to Marcus & Millichap. Supply will also be a problem in New York, with 3,650 units expected to come online this year. “You’re seeing signs that the rent cuts are getting pulled in a little bit,” Willet says. “It’s one market that will probably stabilize over the course of the next year.”