One Result of the Great Recession: An Apartment Surprise

By Bob Bach, Grubb & Ellis:
Counter-forces that have turned the tide in favor of apartments. Mortgages are harder to get because banks are studying the creditworthiness of borrowers more carefully than they did during the boom. Moreover, fewer households want to own property.

During the recent recession, the multi-family market looked like it would be hit hard on several fronts. True, the initial wave of foreclosures pushed displaced households into rental units. But as foreclosures grew and the labor market collapsed in the fall of 2008, apartments looked as though they would bear the brunt of the onrushing storm surge – a lethal combination of millions of lost jobs and a ballooning shadow supply of foreclosed or unsold homes being dumped on the rental market.

Indeed, the vacancy rate for large, professionally managed apartment communities increased from 5.7 percent at year-end 2007 (about when the recession began) to 8.0 percent in the fourth quarter of 2009 and first quarter of 2010 according to Reis. The vacancy rate for all rental units increased from 9.6 percent in the fourth quarter of 2007 to a peak of 11.1 percent in the third quarter of 2009 as reported by the Census Bureau. The story of pessimism went as follows: All the recent graduates unable to find jobs would move in with their families or friends, depriving the market of needed renters. Meanwhile the shadow supply would put further pressure on apartment vacancy and rental rates.

This has certainly happened, but these forces have been overtaken by counter-forces that have turned the tide in favor of apartments. Though mortgage rates remain near record lows, mortgages are harder to get because banks are studying the creditworthiness of borrowers more carefully than they did during the boom.

Moreover, fewer households want to own. Home prices are down by 28 percent from the peak according to the S&P/Case-Shiller Home Price Index. With further declines possible, renters are not rushing to buy as evidenced by home sales data that remain near all-time lows. The labor market, though disappointingly sluggish, has provided a further tailwind for apartments with employers adding 723,000 net new payroll jobs year-to-date through August. These forces have conspired to put the apartment market on a path to recovery. Apartment vacancy rates have fallen slightly from their peaks, and local apartment managers report that demand is firming.

Investors continue to view apartments as the safest of the major property types. Apartments have always been attractive to investors as evidenced by an average cap rate about a percentage point below other property types. Recent trends in the market show that investors’ confidence has not been misplaced.