Multi-Housing News - January 2009 - (Page 12)

Forecast 2009 Apartment Market Shows Cracks But despite short-term setbacks, economic and demographic trends support a positive outlook beyond 2009 By Linwood Thompson, Marcus & Millichap’s National Multi Housing Group The national apartment market fared well throughout the downturn in 2008; however, accelerating job losses will translate into higher vacancies. Total nonfarm employment is forecast to contract by 1.5 million jobs, or 1.1 percent, in 2009. Job losses will outpace cuts during the last recession due to the broader nature of the current downturn. And the return of failed conversion projects to rental inventory and ground-up condo development, along with for-rent homes, will remain a source of competition for multifamily owners, particularly in the Class A segment. The performance gap among metros is widening rapidly. The recession in overbuilt markets such as Las Vegas, Phoenix, Riverside-San Bernardino and most of Florida will make 2009 a tough year. Healthier markets, such as San Francisco, Los Angeles and New York City will also see rising vacancies due to job losses, but are better positioned to get through the downturn. In most metros, Class B/C properties will be the least affected by the economic downturn, as many households will continue to be forced to seek more affordable housing options. Fundamentals in the pricier Class A segment have been disproportionately impacted by eroding household credit quality, which has made it difficult for many renters to qualify for high-end units. Despite short-term setbacks, economic and demographic trends support a positive long-term outlook for apartments beyond 2009. In stark contrast to just a few years ago, mortgage underwriting standards are tight and first-time homebuyer programs are scarce, reducing attrition from the renter pool. Even higher-quality borrowers are facing tougher mortgage standards, with approximately 70 percent of banks tightening requirements for prime mortgages. At the same time, echo boomers—totaling roughly 70 million U.S. residents—are entering their prime renting years, a trend that will continue during the next five to 10 years. On the supply side, construction starts are declining rapidly for all types of residential units, which should translate into a quick recovery for apartment vacancy and rents once economic expansion and job growth return. On average, new supply as a percentage of existing apartment inventory is forecast to reach just 0.7 percent annually through 2010, down considerably from the late 1990s and early 2000s. 2009 National Apartment Market Outlook • Homeownership rates are declining. The U.S. homeownership rate soared from around 66 percent in the late 1990s to more than 69 percent in late 2004. Since 2005, however, the rate has declined to less than 68 percent, resulting in an additional 2.6 million renter households. Once Again, San Francisco Ranks as Top Apartment Market Each year, Marcus & Millichap Research Services releases its National Apartment Index (NAI), a snapshot analysis that ranks 43 apartment markets based on a series of 12-month forward-looking supply and demand indicators. Markets are ranked based on their cumulative weighted-average scores for various indicators, including forecast employment change, vacancy, construction, housing affordability and rents. San Francisco claimed the top spot for the second consecutive year. While the metro area’s large concentration of professional and financial firms is expected to result in job cuts, San Francisco ranked near the top in nearly all of the other measurements. San Diego climbed six places to take over the no. 2 position. Throughout 2009, owners in the market will leverage tight conditions and still-low housing affordability to implement above-average effective rent growth. Washington, D.C., moved up six places to no. 3, as the government will continue to add workers and apartment construction is slowing. Los Angeles checks in at no. 4 this year; developers in the market are responding to limited household formation by easing deliveries, allowing vacancy to remain fairly healthy and supporting modest rent growth. Despite job cuts by prominent local employers, rent growth will continue in the Puget Sound region, and Seattle claimed the no. 5 spot in the NAI. A sluggish housing market caused Oakland (no. 6) to drop one place, but Northern California’s East Bay remains in the top 10 due to relatively low vacancy and above-average rent gains. San Jose fell three spots to no. 7. The metro area is expected to shed jobs again in 2009, but apartment construction will be minimal, which will limit the rise in vacancy. Orange County dropped one position to no. 8 in this year’s index. Layoffs in the local mortgage industry have largely run their course, and we expect the metro to record healthy apartment operating fundamentals. Vacancy in New York City (no. 9) will increase due to deep cuts in investment-related job sectors, but the market will remain one of the tightest in the country. Portland stayed in the no. 10 spot based on healthy expected household growth. • Developers react to slower conditions. Only 80,000 apartments are slated for completion in 2009, down from 98,000 units in 2008. New supply will fall to its lowest level since the mid1990s, as construction financing remains relatively expensive and difficult to obtain. Deliveries will include some projects originally planned as condos that will come online as rentals. • Rise in vacancy expected. The national apartment vacancy rate is expected to rise 100 basis points this year to 7.7 percent. • Rent growth stalling. Effective rents on a national basis will essentially be flat in 2009, falling short of asking rent growth, which is expected to reach 1.7 percent. Rent trends will vary greatly at the metro level, however, with owners in the hardest-hit housing markets using significant concessions to attract and retain renters. In 2008, asking and effective rents rose 2.8 percent and 1.8 percent, respectively. The apartment sector has not been immune to the credit crunch, but it has fared better than 12 January 2009 | Multi-Housing News | Official Publication of Multi-Housing World

Table of Contents for the Digital Edition of Multi-Housing News - January 2009

Multi-Housing News - January 2009
Contents
From the Editor
Market Pulse
Executive Insight
Economic Forecast 2009: The Year Ahead
Apartment Market Outlook
Development & Design: Walkable Neighborhoods
Property Management: Handling Risk in a New Age
Directory: Top Brokers
Kitchen & Bath: Rehabs
Products: Noise Control
Technology: Property Management Software
Property Showcase: St. Regis, Bal Harbour

Multi-Housing News - January 2009