The multifamily industry should brace itself for rising vacancy rates and increased tenant concessions in the coming year, according to Douglas Crocker II, president and CEO of Equity Residential Properties Trust, in analysis of the apartment sector in 2002.

"However, this down cycle will not be anywhere near as deep nor last as long as weak markets of the past, and yields on apartments will still outpace many investment asset classes in 2002," he writes.

Rising vacancy rates will be fueled by several factors in 2002, predicts Crocker. First of all, a growing national unemployment rate will result in many tenants either taking in roommates to help foot the bills or moving in with parents or other family members. Secondly, a predicted upturn in the economy in the latter part of 2002 will result in "a surge in home ownership until interest rates rise again," according to Crocker. Finally, approximately 250,000 new units are expected to come to the market in 2002, an amount that the "industry cannot sustain" during the current downturn, Crocker adds. "Thus, we foresee occupancy dropping in the first two quarters, leveling off in the third quarter, and beginning to improve around the fourth quarter."

Also, the current economic doldrums will trigger a substantial decrease in new construction starts in the upcoming year, according to Crocker. "Construction starts will plummet in 2002 and deliveries will fall to between 175,000 and 200,000 in 2003," he writes. "Assuming even a mild economic recovery, the apartment market will tighten up dramatically in 2003, setting the stage for improved fundamentals."

In the year ahead, apartment owners will focus intensely on holding expenses down, Crocker predicts. "We expect utility costs to be lower due to the lower absolute costs as well as ongoing energy conservation efforts," he writes. Also, while payroll costs will decrease as employee bonuses decline, real estate taxes and insurance expenses are expected to rise in 2002, Crocker adds.