The Expert: Job Losses Dim 2009 Prospects

Apartments weathered the increase in competition from for-rent houses and condominiums relatively well through most of 2008, However, rising jobs losses will push vacancy up more dramatically in 2009.During the fourth quarter, apartment vacancy rose 40 basis points to 6.6 percent, bringing the year-over-year increase to 90 basis points. Markets hit hardest by housing, such as Phoenix, Tucson, Las Vegas and most Florida markets, registered the greatest increases in vacancy over the past year. Markets that held up best were those in which construction was minimal owing to land constraints or generally weaker economic conditions. San Francisco and New York City fall into the former category, while those in the latter are generally in the Midwest, such as Detroit, Indianapolis, Cleveland and Cincinnati. As 2008 came to a close, however, even the more stable apartment markets were softening, a trend that will continue as job cuts reduce demand nationwide.To clear the market, sellers need to adjust price expectations. During the past 12 months, Class A assets in primary markets have traded with average cap rate increases of 25 to 50 basis points and 75 basis points in secondary markets. Class B/C assets have sold with average cap rate increases of 100 to 150 basis points. Most distress sales have been limited to failed conversions, highly leveraged new developments and acquisitions made at the height of the market.Additional distress will emerge, particularly among high-leverage deals, properties experiencing operational challenges and those with maturing debt that may be difficult to refinance due to the constrained capital environment. While Fannie Mae and Freddie Mac remain active in the apartment-lending arena, softer fundamentals will make it difficult for many owners to meet the government-sponsored enterprises’ underwriting and loan-to-value ratio requirements.Contact Linwood Thompson at 678-808-2700 or