The News: Apartment Sector Shines Through Long-Term Prism

Employment forms a key driver for the apartment sector, as job growth leads to household formation. News on that front, however, continues to be bad, as the United States has experienced nine straight months of job declines. And according to the U.S. Labor Department, unemployment reached 6.5 percent in October, the highest in 14 years.In a recent Webcast on the U.S. apartment market and the outlook for the U.S. economy, Hessam Nadji, managing director of research services for Marcus & Millichap Real Estate Investment Services Inc., noted that significant job losses are likely to continue into the first quarter of 2009. He reported that the downturn could lead to 2.7 million jobs lost, similar to the number that the 2001 recession yielded. About the only silver lining that Nadji observed was that companies have been restrained in hiring, which may limit the damage.Factors like the capital market dislocation and a continued gap between buyer and seller expectations have cut apartment investment volume significantly, said Linwood Thompson, senior vice president & managing director of the multi housing group for Marcus & Millichap. Thus far in 2008, apartment deal velocity is off 47 percent from 2007 levels. He noted that he has a difficult time advising his clients to sell an apartment building in the current environment unless it is an absolutely necessity. “Being a real estate broker, that is tough for me to say,” he said.Deal velocity will continue to be subdued in 2009, he predicted. But another declining metric should make apartments an attractive investment over the long haul. New apartment development has been minimal and forms about 1 percent of inventory this year. Thompson forecast that development will be off 30 percent from 2007 and another 50 percent to even 70 percent from 2008 to 2009. That contrasts sharply with the 1980s, for example, when apartment supply grew by an average of 4 percent per year. Immigration to the United States is strong, and a large number of Echo Boomers are entering the apartment rental market, meaning that demand is not likely to be met and rental growth should be strong. “Apartments are likely to be worth dramatically more in 2014 than they are in 2009,” Thompson said.