By Victor Calanog
VICE PRESIDENT OF RESEARCH AND ECONOMICS, REIS INC.
multiFamily hasn’t run out oF steam
In this past February’s column ( sctsm.in/4960), we discussed why the apartment sector’s
robust recovery might experience a slowdown. This past fourth quarter provided reassurance
that multifamily properties weren’t quite done yet with their bull run: Vacancies dipped by 40
basis points to 5.2 percent.
In just two years after hitting an all-time high of 8 percent at the end of the tumultuous 2009,
vacancies have not just recovered, they have surpassed previous lows. At 5.2 percent, vacancies are now below the cyclical trough of 5. 5 percent last observed in late 2006 — before the
travails of the single-family for-sale housing market prompted apartment occupancies to begin deteriorating. In fact, the last time national vacancies approached this level was about a
decade ago in late 2001.
The net increase in the amount of occupied space also experienced a slightly surprising jump
this past fourth quarter, with close to 51,000 units leasing up. The fourth quarter tends to
be a weaker leasing period, given that most households make moving decisions in the second and third quarters, but
the apartment sector exceeded expectations once
again, ostensibly because
of heightened economic
activity in the last three
months of the year. U.S.
this past December at its
fastest rate in six months.
Annualized gross-domes-tic-product (GDP) growth
of 3 percent was the high
point of the year.
APAR TMENT VACANCy AND RENT GRO W Th
Source: Reis Inc.
National asking and effective rent growth, although
positive, represents perhaps the only disappointing figures for the apartment sector in 2011. Reis expected rent
growth in 2011 to be in excess of 4 percent, but subsequently had to ratchet down forecasts
as the year progressed.
What happened? First, the biggest factor was grindingly slow economic growth. Macroeconomic forecasts had GDP growing by 3. 5 percent to 4 percent earlier in the year, but the actual
numbers came in at 1.7 percent. Second, this environment of slow economic growth created
a situation where the rising tide for apartment properties did not lift all boats equally. Higher
quality properties in the most desirable locations posted rent gains in excess of 5 percent to
10 percent, while Class-B and Class-C properties catering to lower-income tenants found it
relatively more difficult to raise rents.
Finally, given how rents and occupancies are jointly determined, it can be argued that relatively modest rent growth at the national level helped buoy the robust improvements in occupancies and absorption. With the economy and labor markets recovering at a painfully slow
rate, runaway rent increases could have stalled vacancy declines.
There is substantial risk of supply growth outstripping demand for rentals, given the large
number of multifamily starts and projects being planned for delivery, but this probably won’t
transpire until 2013. Also, demand for rentals will remain strong as long as the housing market
remains in the doldrums.
The apartment sector has been the best performing property type in commercial real estate
for the past two years, supported by falling homeownership because of the continuing travails
of the for-sale housing market. Unless we enter another contractionary phase because of troubles in Europe or elsewhere, Reis expects vacancies to continue to decline this year, and asking and effective rent growth to accelerate, particularly when vacancies dip below 5 percent.
Victor Calanog, vice president of research and economics at Reis Inc. ( www.reisreports.com), writes a monthly column
on property types for Scotsman Guide. He and his team of economists are responsible for data models, forecasting,
valuation and portfolio services for clients in commercial real estate. Reach him at firstname.lastname@example.org.
eric mingione, team leader for Reis’s quality control department, contributed to this article.
Val Achtemeier EXECUTIVE VICE PRESIDENT CBRE CAPITAL MARKETS
BY RANIA OTEIF Y
Today’s market requires commercial mortgage brokers to have a thorough understanding of the factors
that control their business and the lending environment — particularly as capital has begun to flow again
and allow for deals that are properly packaged to get
financing. Val Achtemeier, who works on institutional
and industrial debt as an executive vice president at
CBRE Capital Markets, shares her views on the industry’s current trends and challenges.
What is the current status of the
commercial mortgage market?
From the lending perspective, I see a lot of positive
signs. There is a lot of liquidity in the market, and risk is
getting priced right now. On the commercial mortgage-backed securities (CMBS) side, 2011 was a volatile year.
We started off very strong in the first half of the year and
then we had some big speed bumps in the second half.
We are hopeful that the market can continue to get some
traction, and we will see CMBS continue to be a good
source of liquidity and gain some ground in 2012. The
life-insurance companies had a very solid production
year in 2011 and have strong allocations again in 2012.
What are the trends in the industrial sector?
The industrial market, in general, is strong, and there
are positive supply-demand fundamentals. We see the
shift in how retail is handled: There is a lot of Internet
shopping, which drives industrial/fulfillment center
demand. That is a net positive for warehouse space
throughout the country, and we are seeing strong industrial absorption. For debt placement, industrial
portfolio loans are attractive to lenders, sometimes
more appealing than individual loans due to geographic and income diversification, critical mass and
less perceived tenant credit risk. We also see extremely
attractive interest rates for office and industrial loans.
Interest rates are in the range of 3 percent to 3. 5 percent for five-year money and 4 percent to 4. 5 percent
for 10-year loans for moderate loan-to-value deals —
sometimes even lower.
What is your advice to commercial
There is a lot of liquidity in the market, but it is still a
bifurcated market with the haves and the have-nots.
Quality, stabilized assets in key markets get the best
pricing and execution. Debt yield is very important; lenders want to know what income is in place that they can
count on. You have to have a handle on your debt yield,
and know where it is right now and where it is headed.
Brokers need to understand how assets fit from a
lender’s risk-reward standpoint and figure out the best
source of capital. They also need to understand the
projects, and the macroeconomic factors that affect
them and the market in order to do a good job advising
clients. This all helps you be able to work with the lenders and your clients to get the best deal.
The loan maturities that are coming up in the next few years
should be a focus, particularly the CMBS loan maturities.
Rania Oteify is an associate editor at Scotsman Guide. Reach
her at (800) 297-6061 or email@example.com.