If there is an upside to the downturn in U.S. housing, it is the recovery of the commercial multi-family market. Apartments are in vogue again, now that home ownership is less than palatable for some and out of reach for so many others.
Despite the fact that the fourth quarter is usually a weak period for the apartment market, given that most families decide to move and lease new apartments during the second and third quarters when school is out, national apartment vacancies fell by half a percent in the fourth quarter of 2010, from 7.1 percent to 6.6 percent, according to Reis, Inc. Close to 58,000 new units were filled.
The good news is that it appears to be a real trend; this latest drop in the vacancy rate follows one of the sharpest drops on record during the third quarter, on top of the fact that the fourth quarter is usually prone to seasonal weakness.
As a result of this new demand, asking and effective rents each grew by 0.5 percent. It's also encouraging that effective rent kept pace with asking rent, which means that landlords are having to make fewer concessions. Experts at Reis cite an improving economy and improving sentiment about the labor market. This latest data also appears to prove that the apartment sector bottomed in the fourth quarter of 2009. It is now leading the recovery in commercial real estate, as the office and retail sectors don't get the boost from the change in housing demand.
Investors may now take a harder look now at real estate investment trusts that specialize in the apartment sector, like Sam Zell's Chicago-based Equity Residential (EQR), Palo Alto, CA-based Essex Property Trust (ESS), Northern Virginia's Avalon Bay (AVBPRH), or Denver-based UDR (UDR). Many of these REITs will be looking for bargains to buy, and they will likely find them.
Multi-family continues to outpace all other sectors in loan defaults in commercial mortgage backed securities. The multi-family delinquency rate rose 68 basis points in December to 16.48 percent, according to a new report from Trepp. Despite a loosening in commercial lending recently and attempts to resolve troubled loans, the delinquency numbers continue to go up, which means more properties will be available for distressed prices.
It begs the question, will the recovery in the apartment sector help to bring down these loan delinquencies?
"In the near-term, it probably won’t help much," notes Ryan Severino, an economist at Reis. "A lot of those CMBS deals were underwritten at the top of the frothy market, before the recession, with very unrealistic expectations about future vacancy rates, rent growth, etc. "
Severino says the recovery still needs far more time to catch up to where we were before the recession, that is, to the expectations used when those original CMBS deals were underwritten.