In Apartment Sector, Better to Buy Than Build

If you’re an apartment property buyer and can obtain financing, now is a good time to find opportunities. But developers would do well to lay low. That was the message from Greg Willett, vice president of research & analysis for M/PF Yieldstar, speaking today during the session “The Flight to Multi-Family: Today’s Apartment Market” at the National Association of Real Estate Editors’ 42nd annual real estate journalism conference.  Generally speaking, few U.S. cities have been overbuilt, he noted, listing only Houston, Phoenix and Austin as markets with significant overdevelopment and Atlanta and Seattle as markets to watch. But the credit crunch hasn’t yet hit the apartment sector, he cautioned, and there are large numbers of projects that had been planned as condominiums that are instead coming online as for-rent properties. About one third of the apartments delivered last year in Washington, D.C., and Boston were started as condos, for instance, and about 20 percent of properties under construction now were begun as condos. The shadow market from for-sale housing and the impact of struggling for-sale properties on job production are also negatives. Demand trends are difficult to predict, with the loss of renters to buying well below the historical norm and not likely to change, Willett said, and foreclosures are not likely to have much impact on the rental apartment market because of the tendency to move into single-family rental homes or smaller, independently owned apartment properties. “It’s about customer choice at this point,” he added. The best fundamentals will likely be found on the West Coast in 2008-2009, Willett said. The 10 top performing markets in order will be San Francisco, Salt Lake City, Oakland, Nashville, Portland, Seattle, San Jose, Philadelphia, Richmond and Austin, he predicted. The worst performers among the 57 cities tracked by M/PF Yieldstar—thanks in large part to condo fallout–include Phoenix, Jacksonville, Memphis, Tampa, Greensboro, Dayton, Las Vegas, Detroit, West Palm Beach and Atlanta (with Atlanta remaining difficult to predict).  Investment transaction volume is down and will likely remain so for the next 12 to 18 months, predicted Mark Alfieri, COO of Behringer Harvard’s Multifamily REIT I. And there are certainly downsides to buying, he noted, including increasing cap rates, lower construction costs and land values (benefiting developers), the difficult financing market and overall economic performance. But his company is pursuing deals, albeit with lower return expectations and in partnership with a Dutch pension fund. Its preferred markets have strong job growth, balanced supply and demand, favorable rent growth and a strong transportation element.  Gables Residential is also active, according to Sue Ansel, COO, although the private REIT’s focus is now on mixed-use properties.