Apartment Market Improvement Sparks Optimism

By Natalie Dolce

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(Mark Your Calendars: RealShare Apartments 2011, October 20 in Los Angeles).

ENCINO-CA-“We’ve hit a soft patch in the economy over the past couple of months, but we will work through it. It is unlikely to become a recession.” So said Hessam Nadji, managing director of research and advisory services at Marcus & Millichap Real Estate Investment Services, during a special mid-year apartment market webcast titled “Soft Patch or Recession.”

The event, presented by locally-based Marcus & Millichap, attracted roughly 2,000 investors nationwide. Nadji focused on the overall economic situation as well as underlying data on apartment fundamentals. One of the primary reasons that the US has entered an economic soft patch, Nadji explained, is the major movement in energy prices.

While there is a lot of concern about the headwinds that the economy is facing, it is in much better shape than it was, according to Nadji. “Employment growth is expected to gain momentum in 2011 and 2012, even if it is just catching up to the long-term average,” he said.

Other topics he touched on included the single-family housing and condo markets, which he said have yet to enter a sustainable recovery because of the waves of foreclosure that remain to be processed. “Housing is clearly in a double-dip situation,” he said, “which will not turn around anytime soon.” Nadji pointed out that most likely, from the next 12 to 18 months, “it is unrealistic that the ‘for sale’ housing market will contribute to economic growth.”

Nadji pointed out that he has seen record demand for apartments. “It has outpaced job growth,” he said. He also pointed out that young adults have been living at home, and “that trend suggests significant pent-up demand.” Apartment vacancy has decreased as well, Nadji said.

Lowest apartment vacancy markets Nadji pointed to include: New York; Minneapolis; San Jose, CA; Portland, OR; San Diego; San Francisco; Milwaukee; and Philadelphia. Higher vacancy markets mentioned include: Jacksonville, FL; Houston; Tucson; Atlanta; Phoenix, Las Vegas, and Columbus, OH.

Providing a review on the capital markets, William E. Hughes, managing director of Marcus & Millichap Capital Corp., was optimistic about the future. He pointed out that funding is available for apartment investments across the board. Hughes also pointed out that lender interest is fueled by sustained improvement in the sector.

In terms of class, Fannie/Freddie and life companies are favoring larger “best-of-class” properties and primary markets, said Hughes. “Lower quality assets with proven, consistent review streams have appeal.”

Hughes also added that he is seeing sources available today along the entire capital stack.

Total multifamily mortgage debt has shrunk from the first quarter by a small amount, said Hughes, but is still approximately $840.1 billion. “We have seen smaller local institutions come to the marketplace, but all in all, we are seeing a little bit of shrinkage in the mortgage debt, and we expect that to continue.

In terms of investor strategies, lenders are extending loans and there are refinance opportunities.

Nadji closed the event by pointing out that if you take a look at the cap rate trend by product type, primary class A product cap rates have compressed quite a bit. Looking at the big picture, apartments have been regaining value since the market bottomed.

Nadji and Hughes, along with Bill Rose, national director of the national retail group, also recently conducted a special mid-year retail market outlook webcast titled “Soft Patch or Recession.” The webcast title was based upon Nadji’s analysis that, although he does not expect a double-dip recession, the US is “in a soft patch” economically. To see the summary of the webcast, check out GlobeSt.com’s article by clicking here.

For more thought leadership from Marcus & Millichap Real Estate Investment Services, check out "StreetSmart," a blog by Hessam Nadji, the firm's managing director of research and advisory services. The blog provides Thought Leadership positions on a variety of commercial real estate-related issues. Click here to watch Nadji on CNBC's "Realty Check" program talking about multifamily and the housing crash. For more information on the Thought Leadership program, contact Scott Thompson at sthompson@alm.com.

Categories: West, Multifamily, Marcus & Millichap, Webinar Event Coverage, Los Angeles