Apartment Rents Slide With Economy

Couuntywide, vacancy is forecast to increase 160 basis points to 6.1% by year-end 2009, following a rise of 90 basis points last year. "As vacancy creeps higher and soft economic conditions restrict demand, owners will offer greater concessions," the forecast says. Asking rents countywide are projected to finish the year at $1,425 per month, a slide of 2.6%, while effective rents will drop 3.4% to $1,362 per month.

The impact of the weakening fundamentals on investment is that sales activity is expected to remain sluggish, but "Experienced local buyers may be preparing to return to the market in search of bargains," the forecast states. It notes that a handful of sales involving assets under threat of foreclosure have taken place recently, a trend that may accelerate as loans come due.

Cap rates have risen roughly 30 basis points over the last year to an average in the high-5% range. With fewer buyers in the market, sales velocity has declined 25% over the past 12 months. The recession has intensified investors' concerns, as transaction activity over the last six months is down more than 20 from levels of the previous six-months.

As in other property sectors, the bid-ask gap between buyers and sellers remains one of the obstacles to closing deals. "Many bargain-seekers are anticipating an increase in multifamily defaults and troubled assets in areas such as the San Fernando Valley," the Marcus & Millichap report notes.

The forecast includes a commentary by William E. Hughes, SVP of Marcus & Millichap Capital Corp., who notes that despite ongoing uncertainty in the financial markets and among some of the country's largest banks, debt financing remains available, and the apartment sector has benefited from the presence of Fannie Mae and Freddie Mac, which continue to fund multifamily loans. Standards have tightened considerably, however, with lenders requiring loan-to-value ratios of 55% to 75% and debt-service coverage ratios are in therange of 1.25 to 1.30, "higher than in recent years, but closer to historical norms," Hughes points out.