The Expert: Apartment Sector Poised for Quick Recovery

The apartment market has softened modestly, but fundamentals remain generally healthy owing to restrained rental construction in recent years, rising residential foreclosure activity and strict home mortgage underwriting. While the return of failed conversion projects to apartment inventory, along with for-rent condominiums and houses, will remain a source of competition for multi-family owners, particularly in the Class A segment, the expanding renter pool has been almost sufficient to counteract the impact on overall vacancy rates.The Class B/C market will remain the least affected by the economic downturn, as many households will continue to be forced to seek more affordable housing options. To the contrary, fundamentals in the pricier Class A segment have been disproportionately affected by the slow economy and eroding household credit quality, which has made it difficult for many renters to qualify for high-end units.Economic and demographic trends support a positive long-term outlook for apartments. In stark contrast to just a few years ago, mortgage underwriting standards are tight and first-time home-buyer programs are scarce, reducing attrition from the renter pool. Even higher-quality borrowers are facing tougher mortgage standards, 70 percent of banks are tightening requirements for prime mortgages in recent quarters. At the same time, Echo Boomers, totaling 70 million U.S. residents, are entering their prime renting 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 have returned. 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, when developers added an average of almost 2 percent per year.Contact Linwood Thompson at 678-808-2700 or