By Victor Calanog
DIRECTOR OF RESEARCH, REIS INC.
apartMent properties’ strong coMeback
In this past August’s Property TypeCast, I wrote about how multifamily properties set new
records for vacancy highs and rent declines in 2009. The story is different in 2010, and things
may look even brighter in 2011.
We now have three quarters’ worth of data showing that the apartment sector bottomed in the
fourth quarter of 2009, with a strong recovery now under way.
The apartment sector emerged from the trough unexpectedly this past first quarter, with vacancies holding steady at 8 percent and rents posting small gains. The first quarter tends to
be weaker, particularly in the Northeast, but traditional patterns of seasonality appear to have
been suspended as labor markets lurched back to life.
The second quarter showed a slight dip in vacancies, going from 8 percent to 7. 8 percent. Occupied stock increased by almost 50,000 units, and asking and effective rents posted gains.
By the third quarter, apartment landlords were certainly smiling. Vacancies declined by 70 basis points, from 7. 8 percent to 7.1 percent — the steepest quarterly drop on record. The market
absorbed almost 94,000 units, the fastest pace of leasing on record since Reis began publishing quarterly data in 1999.
Asking and effective rents
continued to increase,
and landlords tightened or
completely withdrew concession packages.
APAR TMENT VACANCy AND RENT GRO W TH
What is driving these results, if unemployment
continues to hover around
9. 6 percent and economic
growth is disappointing?
First, typically the second and third quarters are
stronger periods because
most households decide to
move and lease new apartments during this time. These seasonal patterns have not been operative since 2008, however, when the Great Recession compelled households to suspend decisions to move and
lease new space.
Source: Reis Inc.
Despite lackluster economic growth and continuing uncertainty in the labor markets, households appear to be returning in droves to the rental market. This reflects some optimism about
an improving job market: It may take individuals six to nine months to find a job, but that is
far better than the situation in early to mid-2009, when the nation was shedding hundreds of
thousands of jobs a month.
In other words, pent-up demand from renters tired of living with their families or roommates
may be driving these results. Another factor seems to be flat or declining trends in house
prices and mortgage rates: There is an incentive to sign 12-month leases for an apartment
rental versus committing to a home and a 30-year mortgage, particularly if home prices and
mortgage rates are expected to stay low. Because the job market is also wobbly, potential
buyers may prefer to rent until they are secure in their new or existing jobs.
All this means that the apartment sector’s nascent recovery is predicated on an expectation
that labor markets will strengthen. If the rate of job creation remains disappointing throughout
2011, it is likely that strong numbers from apartment rentals may moderate.
Victor Calanog, director of research at Reis Inc., writes a monthly column on property types for Scotsman Guide.
As head of Reis’ core economics team, he is responsible for data models, forecasting, valuation and portfolio
services for clients in commercial real estate. Reach him at email@example.com.
Andrew Smith, analyst for Reis’ quality-control group, contributed to this article.
Steven Wechsler PRESIDENT AND CEO NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT TRUSTS
BY JENNIFER E. GARRETT
This past Sept. 14 marked the 50th anniversary of
the creation of real estate investment trusts (REITs)
in the U.S. Despite a faltering market, REITs are
booming, raising $34.7 billion in 2009, second only
to the $40 billion raised in 1997, according to the National Association of Real Estate Investment Trusts
(NAREIT). Steven Wechsler, the association’s president and CEO, explains why REITs are faring so well.
Will this year’s REIT activity match 2009?
Coming out of the great financial crisis, REITs have
been successful in raising equity and debt proceeds in the public capital markets. REITs were able
to quickly recapitalize themselves with equity, pay
down debt and exchange new debt at lower rates
for old debt at higher rates. While 2009 was the sec-ond-biggest year in history, as far as 2010, we are
on a strong track with $32 billion raised in debt and
equity through Sept. 30.
Will increased access to capital lead to in-
creased purchases of real estate?
When REITs are raising funds in the public market,
they are working in part to strengthen their balance
sheet by adding equity and reducing debt. They are
also working to amass that equity to make new acquisitions or to undertake projects that will provide
an adequate risk-adjusted return to their shareholders. I think we’ll see increasing acquisitions.
What do you anticipate seeing in commercial
real estate in 2011?
Companies will be focused on deployment of capital,
looking to seize opportunities. There’s been investor
confidence that is demonstrable through rising stock
prices. Those factors will put REITs in a competitive
position in the investment marketplace for properties.
Also, a significant component of privately held real
estate in the country is overleveraged and will require
an equity infusion to be appropriately recapitalized.
REITs are in a position to help provide that infusion.
What legislation are you monitoring?
NAREIT has been focused on the ability of equity
capital from outside the U.S. to be successfully invested inside the U.S. For 30 years, the Foreign Investment in Real Property Tax Act has effectively
penalized foreign investors in U.S. real estate when
they invest through equity as opposed to debt.
We would like to see Congress equalize the treatment of debt and equity. One way is to ensure that
when a domestically controlled REIT is liquidated,
it’s treated as stock as opposed to real estate. The
other way would be to take the tax treatment of
listed REIT investment from 5 percent to 10 percent,
treating that as stock instead of real estate. In July,
the U.S. House of Representatives passed H.R. 5901
[The Real Estate Jobs and Investment Act of 2010],
which moved that 5 percent to 10 percent. Now we’re
looking for the Senate to act.
Jennifer E. Garrett is an associate editor at Scotsman Guide.
Reach her at (800) 297-6061 or firstname.lastname@example.org.