Multifamily Sector Continues Rapid Growth

As the for-sale housing market continues its uneven recovery, the multifamily or rental apartment industry retains its title as the top-performing real estate sector. Its continued strong showing, particularly rising rents, is even prompting some consumers to consider purchasing a home rather than continuing to rent.

At least for now, most consumers are still opting to pay higher rental rates rather than buying. But I am hearing from some real estate professionals in the New York area that homebuyer demand has begun to pick up. Perhaps consumers believe the housing market is at or near bottom, or maybe they have just grown frustrated with the amount of money they are spending on rent. We’ll see. It’s way too early to tell, in my estimation.

The latest figures from the National Multi Housing Council indicate that market conditions, which were considered strong at the end of 2011, improved in the first three months of this year in the multifamily arena.

Mark Obrinksy, chief economist for the council, said in a press release on its Quarterly Survey of Apartment Market Conditions that conditions improved across the board, "even from the rather strong level of three months ago." Demand continues to grow for both apartment units and apartment properties. "We anticipate this increasing further in the coming years due in part to the large number of younger households moving into the housing market and a greater preference shown for renting."

Few new multihousing units are being constructed -- a trend likely to support the profitability of available communities.

The survey’s four indexes measuring market tightness (74), sales volume (57), equity financing (62), and debt financing (65) remained above 50 for the eighth time in the past nine quarters. Council officials say an index number above 50 indicates quarterly growth.

The one caveat in this glowing report on the multifamily industry is that capital availability was spotty. Only 17% of multifamily firms reported that capital was available for all property types in all markets in the first quarter, while 36% said capital was constrained in secondary and tertiary markets, and 34% said money was tight for even top-tier properties in primary markets.

Multifamily developers such as AvalonBay Communities Inc. (NYSE: AVB) and Equity Residential (NYSE: EQR) are reaping the dividends. AvalonBay’s stock closed Monday at $145.66 a share, up from a 52-week low of $107.54. Equity Residential closed Monday at $61.44, up from a 52-week low of nearly $48.50.

In releasing its first-quarter results last week, AvalonBay CEO and president Tim Naughton said same store net operating income (NOI) growth exceeded 10% for the second consecutive quarter -- the first time that has occurred in the past 10 years. He also said solid fundamentals, rising rents, attractive land and construction costs, and the completion of new rental communities will continue to drive its income growth.

AvalonBay, known for developing upscale apartment complexes, plans to capitalize on the growing rental market by forming three distinct brands to focus on upscale units, moderately priced units for suburbanites, and younger renters in urban areas.

David J. Neithercut, Equity Residential’s president and CEO, also spoke of strong fundamentals across all its core markets, which drove first-quarter NOI up nearly 8%. As his firm enters the primary leasing season, it expects to achieve same store revenue growth somewhere between 5% and 6% for 2012.

Other sectors of the real estate market (excluding housing) continue to post mixed results. The privately held commercial brokerage firm Cushman & Wakefield reported recently that average asking rents for US office space increased in the first three months of 2012. The overall average asking rental rate for US Central Business Districts increased to $37.70 a square foot at the end of the first quarter -- the highest level since the first quarter of 2009. Overall rental rates increased 1.3% from the end of 2011 and 5.2% from the end of the first quarter of last year.

Eighteen of the 30 US CBD office markets tracked by Cushman & Wakefield reported a quarterly increase in average asking rents, while 12 posted a decrease. Markets with the largest quarterly increases included San Francisco (up $3.60 to $46.12 per square foot), Midtown South Manhattan (up $2.55 to $48.45 a square foot), Midtown Manhattan (up $1.26 to $66.68 per square foot), Houston (up $0.75 to $31.88 a square foot), and Chicago (up $0.56 to $31.84 a square foot).

Rates increased despite a slowdown in overall leasing activity in US CBDs in the first quarter. A total of 15.6 million square feet of office leases were reported in the first quarter -- a 16.3% decline from the 18.2 million square feet in the first quarter of 2011.

Maria Sicola, executive managing director of research for Cushman & Wakefield, said that even though leasing activity is expected to fall further this quarter, the firm predicts a "noticeable pickup" in the second half of 2012.

In its recently released first-quarter report, CBRE Econometric Advisors, formerly Torto Wheaton Research, said the US office vacancy rate was unchanged in the first quarter at 16%. The national industrial real estate availability rate fell 20 basis points to 13.4%, and the retail availability rate remained flat at 13.1%.

Rental apartment demand continued to accelerate, CBRE-EA said. The multifamily vacancy rate declined 90 basis points to 5.1% -- the most significant improvement in two years.

Jon Southard, managing director of CBRE-EA, said in a press release that, despite a pickup in hiring, the only real estate sector that shows strong improvement is multifamily:

For property types with longer leases, the employment gains served mostly to fill in 'shadow vacancy' -- space that was previously leased but not used. The delay between stronger employment and a pick-up in leasing demand is typical for the early stages of recovery in the office, industrial, and retail sectors.

Let’s hope so.