Make no mistake about it: The recession that began in March 2001 certainly has not marked the greatest of times for the nation’s apartment sector. Many markets have seen vacancies spike, and concessions to attract tenants are popping up seemingly at every turn. However, industry members maintain the multifamily sector is in better shape than in previous recessions and is 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."
Noting U. S. Federal Reserve Chairman Alan Greenspan’s recent comments that an economic recovery is already under way, Obrinsky adds that apartment demand could pick up in the second half of this year. "The outlook is positive. The demographics are there, and the interest from investors is there," he says. "There’s not significant overbuilding, but demand dropped off sharply and unexpectedly" due to the recession and in particular the terrorist attacks of Sept. 11.
In fourth-quarter 2001, the national apartment occupancy rate 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. (Note: Reis’ numbers include Class-A, Class-B and Class-C apartments.) By contrast, the national occupancy rate as calculated by Reis climbed fairly steady throughout the 1990s and peaked at year-end 2000.
Reis is projecting that the occupancy rate will continue to decrease during the next several years, reaching 93.9% by year-end 2006, according to Andrew Wright, a senior consultant at Reis. That’s in part because the company is forecasting a fairly steady supply of newly constructed units of approximately 100,000 units per year in the top 50 metropolitan markets until then, which Wright estimates will overshoot demand by approximately 15,000 units per year. Reis’ supply statistics are for non rent-restricted units that are in buildings of at least 40 units, except in California, where they are in buildings of at least 15 units.
However, Wright cautions that Reis’ projections could change. Referring to the estimated numbers, he notes developers could reduce their pipelines. "If there is a continued softening, they could scale back," he says.
On the other hand, Obrinsky believes that vacancy rates will begin to decline after the economic recovery has begun and job growth begins again. Approximately 1.1 million U.S. jobs were lost during 2001, according to the Bureau of Labor Statistics.
There is more humbling— 2001 saw a negative net absorption of approximately 22,000 units, according to Reis. The company had previously recorded positive annual absorption stats in every year since 1980, when the company began its reports. In a bit of good news, rent growth at year-end 2002 is projected to register a 3.2% increase from year-end 2001, according to Reis.
Different from other recessions
Whatever the difficulties the multifamily sector has encountered during the latest recession, industry members 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 last year, only .43% of multifamily loans at commercial banks were delinquent, compared with .39% in third-quarter 2001 and .44% in fourth-quarter 2000, according to the Federal Deposit Insurance Corp. Those aren’t the figures one would expect if there were a serious oversupply of apartment units, says Obrinsky. Those numbers also were significantly more dire during the recession of the early 1990s. For example, 7.6% of such loans were delinquent in second-quarter 1991.
Harvey Green, president and CEO of Encino, Calif.-based Marcus & Millichap Real Estate InvestmentCo., says the apartment sector, both from a renter demand standpoint and an investment standpoint, is on solid footing.
"I think the apartment market is going to roar into 2003," predicts Green, president and CEO of Encino, Calif.-based Marcus & Millichap Real Estate Investment Brokerage Co. "As a general statement, there has been no eroding of cap rates. Availability of debt and cost of debt will be significantly advantageous. As a whole, the supply and demand has been in good balance."