Phoenix—As apartment owners and developers gather here for this magazine’s annual conference, there’s a lot for them to feel positive about despite the nation’s economic downturn and the sinking stock market.
Unfortunately, the positive story about apartments has gotten lost in the roar of bad news about single-family home sales and rising home mortgage foreclosure rates. Apartment fundamentals may be sound, but that has not stopped real estate writers and Wall Street stock analysts from badmouthing our industry.
Even the National Association of Home Builders lumped apartments in with singlefamily housing in a recent statement.
Apartment firms need to fight back, and I don’t mean just the publicly traded ones the analysts cover. Negative word of mouth about apartments reverberates from Wall Street all the way down to Main Street. Unfairly negative descriptions of our industry don’t just hurt the capital raising ability of the biggest real estate investment trusts, they also affect access to capital markets for small owners and developers.
In its latest Market Trends report, the National Multi Housing Council (NMHC) took issue with the negativity. It said conditions in the apartment sector remain strong.
“Apartment owners exercised great restraint during the housing boom,” noted NMHC chief economist Mark Obrinsky. “As a result, they have escaped the oversupply problems plaguing the single-family sector.”
Last year, he went on, the number of apartment absorptions at investment-grade properties increased by the largest amount since 2000. In fact, the increase was as large as that for the previous four years combined.
Between 2004 and 2006, 1.2 million households joined the ranks of renters, more than making up for the loss in renter households sustained from 2002 to 2004.
Obrinsky concluded that the recent decline in the homeownership rate has increased demand for apartment residences, especially at top-tier properties.
The number of renters nationwide is projected to increase by almost 4 million households over the next 10 years. Half of those households will likely rent apartments, with the rest renting single-family homes, duplexes, or other types of housing. To meet that demand, the nation needs to produce at least 250,000 new apartment residences each year, NMHC said. Yet apartment completions have averaged just two-thirds of that in recent years. Last year, both starts and completions of all multifamily units (both condos and rental apartments) fell to their lowest levels since 1996 and 1997, respectively.
“By all measures, new apartment supply clearly remains in check,” said Obrinsky. “Thanks to those solid fundamentals, rents continue to show modest increases even as single-family house prices continue to fall.”
Rents for professionally managed apartments tracked by M/PF YieldStar rose by 3.5 percent in the fourth quarter of 2007, a pickup from the 2.9 percent increase of the previous two quarters. Apartment vacancy rates have changed little over the last five quarters and are at exactly the same level as a year ago, NMHC found.
“Real” returns (that is, returns over and above the rate of inflation) to privately held apartments have averaged almost 11 percent over the last five years, according to NMHC.
Finally, the long-term demographic trends are quite favorable for rental housing.
The positive story about apartments needs to be told loudly and frequently. Otherwise, the negativity among the media and Wall Street analysts could become a self-fulfilling prophecy. Use the NMHC data in your community. Tell your bankers and potential investors the good news about apartments.
