NEW YORK CITY-It’s out. The 2013 National Apartment Index prepared by Marcus &Millichap Real Estate Investment Services, and the news, for the most part, is positive as the economy continues to sail for calmer waters.
(To access the full report and the 44-city Index, click here and sign up!)
The report sets the apartment forecast against the confident belief that certainty—as opposed to the uncertainty that marked 2012—will continue to grow, although this confidence is based on the hope that such issues as the fiscal cliff will continue to find resolution or that employment will continue to increase.
As their introductory remarks to the report indicate, president and CEO John J. Kerin and managing director of research and advisory services Hessam Nadji, says they are “looking forward to the year ahead marked by more certainty and renewed confidence.” But that doesn’t mean there is no risk here.
“The fact is that taxes will increase, which will likely reduce consumer spending, concurrent with some level of federal spending cuts,” the executives write. “However, clarity on fiscal policy, an extended period of accommodative monetary policy, and more fluid credit markets will move decisionmakers to increase hiring and business investment by the second half of the year.”
Much of this investment activity will be from players interested in avoiding the herd and going for the value-add opportunities found in second-tier markets and B- or C-class assets. As the report states, “The overall cap rate declined 30 basis points to 6.2% from a year earlier, a rate more reflective of the yield in secondary markets at 6.9%.
“Transaction volume of $25.1 billion recorded in secondary markets fell just shy of sales in primary markets,” the report continues. But, “on a relative basis, secondary and tertiary markets posted respective increases in sales volume of 49% and 45%, compared with a 38% increase in primary markets.”
Possibly a mark of improving conditions, the report predicts that underwriters will be a bit more willing to go out on a limb, possibly more so than other sectors. “Underwriting will become increasingly aggressive,” the authors state, “with lenders willing to provide construction to permanent loans and flexibility in loan terms, such as recourse that burns off as milestones are achieved. Still, lenders will focus on cash flow rather than value when evaluating investments.”
Jobs will continue to rise this year (See chart above), a factor that will impact all sectors, of course. But in multifamily, that means absorption and new construction.
“Apartment equilibrium signals a new development cycle,” says the report. “US vacancy should decline 10 basis points to 4.3% by the end of 2013, resulting in 4.7% effective rent growth. Forecast completions will trend higher, totaling nearly 150,000 units, roughly matching net absorption. Brief supply imbalances may emerge in many metros.”
The report also features the annual Apartment Index, ranking cities by forecast economic, supply and demand conditions. The top five for 2013 are:
• #1 New York (Up from #3 last year;
• #2 San Jose (which slipped from last year’s first place ranking);
• #3 San Francisco (which was #2 in 2012)
• #4 Orange County (#5 last year); and
• #5 Seattle/Tacoma (jumping three positions from last year’s #8)