A budding recovery for multifamily: apartments will start to rebound in 2004, but 2005 is likely to be the year they come into full bloom. We profile three markets to get a better reading on market conditions.

Author:Bell, John

THE NATION'S MULTIFAMILY MARKET IS POISED FOR RECOVERY following several quarters of rising vacancy rates and negative rent growth, according to industry sources. And while no one is predicting an abrupt turnaround, economic indicators in place point to a slow, steady comeback, with 2004 seen as a transition year leading to a strong recovery in 2005. * Job growth drives the multifamily market more than any other factor, and signs are encouraging that a pickup in employment has begun. Nearly 300,000 new jobs were created in the three-month period of August to October 2003, according to the U.S. Department of Labor. Although this is a minuscule number compared with the recessionary loss of more than 3 million jobs, at least it's a step in the right direction. * In February the Department of Labor reported that manufacturing productivity grew 4.8 percent in fourth-quarter 2003 from third-quarter 2003. On an annual average basis, output per hour in the manufacturing sector posted a 4.3 percent increase in 2003.


Productivity gains help companies' bottom lines so they can be less focused on cutting costs and more focused on expanding their businesses. That's a positive for future job growth.

Also in February, the Department of Commerce reported the overall economy grew at an annual rate of 4.0 percent in the fourth quarter of 2003--a rate described by the Department of Commerce as a "healthy pace."

NMHC's survey suggests worst may be over

One of the prime indicators of looming improvement in the multifamily market is the Washington, D.C.-based National Multi Housing Council's (NMHC's) fourth-quarter 2003 Survey of Apartment Market Conditions.

The NMHC survey, released Jan. 29, 2004, reports that for the first time in its nearly five-year history, all four indexes used to measure changes in apartment market conditions--the Market Tightness Index, the Sales Volume Index, the Equity Financing Index and the Debt Financing Index--edged above 50.

A score higher than 50 means more respondents saw improving conditions than worsening conditions over the past three months. The breakdown is as follows:

* For the second quarter in a row, the Market Tightness Index, reflecting changes in vacancy rates and rent increases, remained above 50. Before October 2003, the index had not been above 50 for two years.

* The Sales Volume Index edged down a bit from 57 to 52, but still remained above 50, showing continuing increases in sales volume in markets around the country.

* The Equity Financing Index rose for the fourth quarter to 61, exceeding 50 for the sixth time in the last seven quarters. This is a further indication that investors continue to favor apartment properties as an investment alternative.

* The Debt Financing Index rebounded from 43 in October 2003 to 64, indicating an improvement in multifamily mortgage borrowing conditions.

"The January survey results provide further evidence that the worst may be over for the apartment industry," says Mark Obrinsky, NMHC vice president of research and chief economist. "There have been several signs of improvement in several months; the question now is whether these improvements will be sustained. A brighter employment picture is still the key to improving the demand for apartment residences."

Recovery signs

Doug Bibby, NMHC's president, says there are growing signs of a turnaround in the macro economy, which makes for a more upbeat multifamily outlook. However, he cautions, "Even though we are seeing a potential turnaround, multifamily won't feel recovery until more than 200,000 new jobs a month are created. And that's going to take a minimum GDP [gross domestic product] growth of 3 1/2 percent per quarter."

Linwood Thompson, managing director of the multihousing group in the Atlanta office of Encino, California-based Marcus & Millichap, real estate investment broker, says the market is on its way to recovery.

"The Fed has pledged to keep interest rates low, at least for the short term, and rent concessions are starting to pull back in a number of markets," Thompson adds.

Thompson says Southern California, including San Bernardino-Riverside, Los Angeles, Orange County and San Diego, is the nation's strongest apartment market, "head and shoulders above the rest."

Las Vegas, profiled later in this article, is another strong market. Markets not quite that strong but still healthy are Chicago, Philadelphia and Phoenix, while Atlanta, Houston and Dallas rank as weaker markets, Thompson says.

John Cannon, senior vice president and managing director of Horsham, Pennsylvania--based GMAC Commercial Mortgage, says the apartment market has bottomed out and is starting to turn around slowly. He concedes there are some soft spots, such as Atlanta and Austin, Texas, but sees the market firming up in the wake of job growth and higher interest rates, which are expected to put the brakes on single-family housing.

Keith Misner, senior managing director, Apartment Group, in the Washington, D.C., office of New York-based Cushman & Wakefield, agrees that the market has bottomed out and is on its way to recovery.

"The pace of recovery will be market-specific," he says. "Occupancies are improving, and once people are in place they can be renewed without rental concessions. As concessions burn off, the renter is already there, so the landlord has a better chance of keeping that person."

Kenneth Danter, president of The Danter Company, Columbus, Ohio, national real estate consultant, agrees. "There are some signs of recovery, but it won't happen quickly," he says. "We're beginning to turn the corner, though, because there's a decline of new product coming online and existing inventory is being absorbed."

Jay Brinkmann, vice president of research and economics at the Mortgage Bankers Association (MBA), says there's still some concern with vacancy levels nationally, but operators have been able to maintain income by moving to lower-cost financing, variable-rate, LIBOR-based (London interbank offered rate-based) loans that lower their debt service requirement.

Another major source of multifamily data is New York-based Moody's Investors Service, through its quarterly CMBS: Red-Yellow-Green[TM] Updates. These reports rate the health of various real estate product sectors and markets. The red-yellow-green rankings peg the relative strength of commercial property types and markets...

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