The multifamily market posted strong gains in 2011, and many investors see that trend continuing as apartments will remain a favored CRE class in 2012.
According to Marcus & Millichap’s 2012 National Apartment Report, U.S. vacancy should reach 5 percent by the end of 2012, a 40-basis-point decline since 2011, and resulting in 4.8 percent effective rent growth. Forecast completions will total nearly 85,000 units, still critically short of a conservative demand forecast for 120,000 units, initiating a new development cycle.
Locally, many investors are predicting occupancy in most core markets to remain strong, despite a normally slow period during the winter.
“We’re still seeing a very robust market. I think it will be as good if not a little bit better than last year’s market,” said Jim Cunningham, executive vice president at Marquette Companies. “Traditionally, for this time of year, you’ll see a little more softness because people don’t want to move in the middle of snowstorms. But we’re very confident and positive, and our budgets are reflecting it as well.”
In the Chicago area, completions will increase, but tenant demand will grow at a faster pace, reducing vacancy for the third consecutive year in 2012, according to Marcus and Millichap’s report. Occupancy and rents will strengthen throughout the year as newly employed residents move into rental housing, but the progress of developments through the supply pipeline will limit additional declines in vacancy beyond 2012.
“We think the demographics are such and the lack of new supply to meet the demand is going to keep pushing rents in an upward trend,” said Nick Ryan, managing director at Marquette Companies. “The suburban markets are undersupplied, and there is a balance supply coming in the market downtown.”
Additionally, the apartment report states asking rents in the Chicago market will rise 4 percent to $1,115 per month in 2012. Effective rents will advance 4.8 percent to $1,055 per month.
“I think (rents) will rise again at a pretty good rate in 2012, and then 2013 depends upon that delivery schedule,” said Tony Rossi Sr., president of RMK Management. “You could get back to more normal increases, but I think 2012 should be fairly strong.”
Marcus & Millichap’s report goes on to say that there were approximately 15,000 rentals planned in the Chicago metropolitan area at the end of 2011, an amount that would expand rental stock 3.4 percent if all of the projects come online. Planned rentals in the Loop would expand stock by 15 percent, while the Gold Coast faces a potential 9 percent increase in rental stock.
However, Dave Hendrickson, managing director with Jones Lang LaSalle, said there will be few new deliveries until 2013 and 2014.
“There’s really no significant product being delivered in 2012, so the market should remain tight and should continue to go up,” he said. “Personally, I think that the 2013 and 2014 deliveries will create a temporary imbalance. There will be a temporary oversupply as all of this product comes online. But that will get absorbed as the economy continues to improve. By 2014 and 2015, we’ll be back to a tight market.”
Flight to quality
With economic conditions slowly improving nationwide, apartment dwellers also will be looking for more quality properties.
According to Marcus & Millichap’s report, institutional appetites for prime, Class A product in metropolitan Chicago remain unfulfilled, while the market for Class B/C assets was gradually gaining momentum at the end of last year. Property owners with equity in stabilized Class B/C assets increasingly will take advantage of another year of low interest rates and strong demand to list assets.
“Ultimately, I think there is going to be a flight to quality,” said, Sean Spellman, vice president and general manager of Opus Development Corp. “I think that there is a demand for quality apartments with proximity to work and play. The new units are going to be of a higher quality to attract the higher-end renter. For some of these high-end units, you need to be the first or second development out of the ground in a certain submarket to capture that new renter and that high-end renter.”
In addition, city locations will remain primary targets for developers, due to the expected migration to urban areas by young residents entering the workforce, the apartment report noted.
With young adults waiting to get married until later in life, real estate professionals in the multifamily market are seeing an opportunity to attract tenants seeking the convenience of apartments.
Total employment in the Chicago metropolitan area also will increase 1 percent in 2012, or by 42,000 jobs, the apartment report states.
Decline in single-housing demand
Young renters who are waiting longer to purchase homes also are fueling the demand for apartments, according to observers.
“If you look at the numbers, people are getting married later in life,” Spellman said. “We’re going after the single young professionals and maybe the newlywed couples. The fundamentals of owning a home and underwriting the lenders and buying a first home have changed. Apartments provide people with flexibility, which lets them figure out where they’re going with their life before they settle down into a home. They do fill a pretty big niche.”
Uncertainty in the economy also plays a role in a consumer’s decision to rent rather than purchase a home, according to Cunningham.
“There is so much uncertainty in the relative overall economic situation, and apartments provide that safety net where (renters) don’t have to make that critical buying decision,” he said. “They can see what happens and watch how their job goes and be able to scale the level of the apartment they want. They have much more opportunity to live in different areas and have that flexibility.”