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2009 National Apartment Report - Executive Summary
National Apartment Index
- San Francisco retained the top position in this year’s National Apartment Index
(NAI), supported by the strongest effective rent growth in the ranking. San Diego
climbed six places to #2 due to the lowest vacancy rate of the markets covered.
- Metro areas with high barriers to apartment construction and low home affordability
continue to fare well in the NAI, even as home prices have fallen. Oakland (#6),
San Jose (#7), Orange County (#8) and New York City (#9) all rank near the top of
the index because of their high propensity to capture renters, despite forecast
job losses.
- Economic volatility is reflected in the NAI, as markets that consistently fared
well during the housing boom, such as Las Vegas (#16) and Phoenix (#31), have fallen.
Many stable Midwestern markets, on the other hand, including Minneapolis-St. Paul
(#15) and Milwaukee (#20), posted the most significant moves up in the index.
National Economy
- The economy withstood the housing and capital markets shakeup through much of 2008,
but the deterioration of the financial markets and deep job cuts anticipated for
the fourth quarter elevated the turmoil into a more severe economic crisis. Government
intervention has reached unprecedented levels and will likely result in another
stimulus package, however, the impact of the measures will take time to filter through
the economy.
- GDP is forecast to decline by an annualized 2.5 percent to 3.0 percent from peak
to trough, the most significant recession since the early 1980s. While the housing
market is expected to bottom and financial markets should stabilize by midyear,
downside risks are present, including looming concerns for the auto industry.
- Total nonfarm employment is forecast to contract by 1.5 million jobs, or 1.1 percent,
in 2009, though reductions will be concentrated in the first half of the year. In
2008, net job losses totaled 2.3 million positions.
National Apartment Market Overview
- Despite some weakness, apartments will register the healthiest fundamentals among
major commercial property sectors. The U.S. homeownership rate rose from 66 percent
in the late 1990s to more than 69 percent in late 2004. Since 2005, the rate has
declined to less than 68 percent, or by 2.6 million households, most of whom are
likely renters.
- The national apartment vacancy rate is forecast to increase 100 basis points in
2009 to 7.7 percent due to job losses and competition from shadow rentals.
- Average effective rents nationally will be flat in 2009, while asking rent growth
is expected to reach 1.7 percent. Rent trends will vary greatly at the metro level,
with owners in the hardest-hit housing markets reducing rents and offering significant
concessions to attract and retain renters.
Capital Markets
- While financing for commercial real estate has been more difficult to obtain, the
apartment market has been supported by Fannie Mae and Freddie Mac. Low delinquency
in the agencies’ multi-family portfolios has enabled them to remain active, despite
being seized by the Treasury after recording heavy losses associated with their
single-family loans.
- The government has moved from one-off solutions to attempts at a systemic fix through
the issuance of unprecedented amounts of credit to the banking and securities industries
and the purchases of equity stakes in financial institutions. The benefits of these
actions have yet to trickle through the system, and credit will likely remain tight.
- Investors should expect debt-service coverage ratios in the 1.25 to 1.30 range this
year, which is well above the average in recent years but closer to historical norms.
Loan-to-values have declined significantly over the past 18 months to approximately
60 percent to 70 percent, reflecting greater lender caution.
Investment Outlook
- Tightened lending standards and a pricing disconnect between buyers and sellers
are hampering sales activity. In 2008, sales volume was down nearly 50 percent from
year-earlier levels.
- The apartment investment market has been bifurcated by the current transactional
climate. Properties that have to be sold require discounting, while a long-term
outlook supports apartment values due to strong fundamentals. Price adjustments
will continue to be driven by property quality and market.
- More than half of the commercial property transactions over the past year have involved
assumable or seller financing. Buyers will continue to be attracted to these opportunities
but still have to meet tighter lending qualifications.
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