National apartment occupancy rate continues to fall: How severe is the problem?

THE RECESSION THAT BEGAN IN MARCH 2001 certainly has not marked the greatest of times for the nation's apartment sector. However, industry members maintain the multifamily sector is in better shape than in previous recessions and well-positioned for a recovery.

“This is a recession, and demand has slipped,” confirms Mark Obrinsky, vice president of research and chief economist at the National Multi Housing Council (NMHC) in Washington, D.C. “That's what we expect to happen in a recession.”

In fourth-quarter 2001, the national apartment occupancy rate for investment-grade properties declined to 95.2%, down from 96.2% in the third quarter and from 97% one year earlier, according to New York-based Reis Inc., a commercial real estate research firm. By contrast, the national occupancy rate as calculated by Reis climbed consistently through the 1990s, peaking at year-end 2000.

Reis projects that the occupancy rate will continue to decrease during the next several years, reaching 93.9% by year-end 2006, according to Andrew Wright, senior consultant at Reis. That's in part because the company is forecasting a supply of approximately 100,000 new units per year in the top 50 metropolitan markets until then, which Wright estimates will overshoot demand by about 15,000 units per year.

Obrinsky believes that occupancy rates, which he says are still low despite the recent rise, will begin to increase after a recovery has begun and job growth returns.

Industry observers also argue that the sector is on much more solid footing than in previous recessions. “In the late 1980s and early 1990s, the apartment market had a lot more liquidity and speculative completions,” says Ross Smotrich, an apartment REIT analyst and managing director of New York-based Bear, Stearns & Co. Inc. “Now, owners are better capitalized, less leveraged and more mature.”

In the fourth quarter of 2001, only 0.43% of multifamily loans at commercial banks were delinquent, compared with 0.39% in third-quarter 2001 and 0.44% in fourth-quarter 2000, according to the Federal Deposit Insurance Corp. Those aren't the figures one would expect if there was a serious apartment oversupply, says Obrinsky. Those percentages also were much higher during the recession of the early 1990s. For example, 7.6% of such loans were delinquent in second-quarter 1991.

New legislation seeks to clarify LIHTC calculations

DEVELOPERS OF AFFORDABLE apartments are fighting an Internal Revenue Service (IRS) ruling that they claim reduces the amount of equity financing their projects can receive.

Companion bills (S. 2006 and H.R. 3324) have recently been introduced in the U.S. Senate and House that seek to override a ruling by the IRS in fall 2000 that impact fees and certain land preparation costs can not be used to determine an affordable housing community's allotment of Low-Income Housing Tax Credits (LIHTCs).

To obtain tax credits, developers apply to state housing agencies. If their applications are approved, developers then market those credits in order to raise equity for their affordable apartment project.

By reducing the development costs that state housing agencies can consider when awarding LIHTCs, the IRS has reduced the amount of tax credits and thus equity funding a project can receive, say industry members.

“The effect was that a project could receive 5% to 10% less equity funding,” says Michael Novogradac, partner of Novogradac & Co., an affordable housing consulting firm based in San Francisco.

In February, the IRS reversed itself solely on the impact fee issue. The bills seek to end the controversy once and for all by clarifying that impact fees, along with certain site preparation and construction financing costs, can be used in the calculation of tax credits for a project.

Both the House and Senate bills have bipartisan sponsorship, but Novogradac says their passage in the immediate future is uncertain. The LIHTC program is too small for the bills to be considered on their own, and so they will have to be attached to broader tax legislation, he says.