The Apartment Market is on the Mend!

Doug Marshall, CCIM
Market Assessment

Whether you read the Norris & Stevens most recent Apartment Investors Journal or listen to CoStar’s recent webinar overview on the U.S. apartment market or read Portland State University’s Real Estate Quarterly for August, all are in agreement – THE APARTMENT MARKET IS ON THE MEND!

The apartment market bottomed out in the last half of 2009 and several factors indicate that it has turned a corner, such as:

• Vacancy rates have dropped
• Concessions are being reduced
• Effective rent growth has turned positive
• Demand for apartments is up
• Supply of new rental product is down
• Cap rates are being compressed

Vacancy rates have dropped – according to the Metropolitan Multifamily Housing Association the apartment vacancy rate for the Portland metro area is currently 5.1%, down from 5.9% in the fall of 2009.

Nationally, CoStar is reporting a decline in apartment vacancy from 8.4% last year to about 8.0% at the end of the second quarter of 2010.

Concessions are being reduced – concessions are more difficult to track but generally it is believed, and anectdotal evidence suggests, that there are fewer concessions being offered and for smaller amounts than last year at this time.

Effective rent growth has turned positive – according to Norris & Stevens, older apartments have increased rents 0.8% and newer units increased 2.34% from 2009 to 2010.

CoStar is reporting positive effective rent growth of about 0.7% for Class A & B properties in the first half of 2010, the first time since the fourth quarter of 2008; effective rent growth for Class C properties is almost at breakeven.

Demand for apartments is up – Norris & Stevens report cites a Barron’s article which projects a decrease in home ownership from the current 67.2% of all households to 64% by 2015.

Apartments will gain a stronger market share as many families lose their homes to foreclosure. Stricter lending guidelines for home loans will continue this trend. For every 1% drop in home ownership results in 1.4 million new rental households.

Supply of new rental product is down – according to PSU’s Real Estate Quarterly Summer edition new apartment construction has experienced a strong drop off in 2009 and for the first half of 2010.

Historically, Portland has averaged almost 2,000 permits for multi-family units annually. Last year Portland issued 235 multi-family permits and through June of this year only 164 units. Washington, Multnomah & Clackamas counties have experienced similar declines.

Cap rates are compressing – CoStar reports that cap rates have declined from 7.0% to 6.4% in the past 6 months.

However, there are too few sales in the Portland market to show a trend. Norris & Stevens reports cap rate averages by county ranging from a low of 6.5% to a high of 8.73%.

This all bodes well for the apartment investor. The big question is when will the other property types follow along?

Who’s Financing Transactions for the First Six Months of 2010?

Doug Marshall, CCIM
Market Assessment


In my last market assessment we analyzed the transaction activity for the first 6 months of 2010 compared to previous years.

This information was taken from the CoStar database for transactions above $1 million, for investment properties (no owner occupied) and for the geographic area from Kelso to Eugene along the I-5 corridor including Bend.

To summarize, there were a total of 59 sales transactions for the first half of this year; transaction activity peaked in 2007 at 251 and has stair stepped downward each subsequent year to where we are today. This represents a 76% reduction in sales activity since 2007.

For more details on the sales activity in our geographic area since 2006 I encourage you to read my last market assessment.

Of the 59 transactions closed in the first half of 2010, 51 transactions identified the lender. Shown below is a summary of these lending sources:

	All Cash Buyers	17	33%
	Loans Assumed	2	4%
	Local/Regional Banks	7	14%
	National Banks	10	20%
	Fannie Mae	6	12%
	Seller Financed	9	18%
		51	100%

There are a couple interesting tidbits from this data: 1) 54% of the transactions did not require conventional financing; they were either all cash buyers, the existing loans were assumed or seller financing was used; and 2) there were no life company loans, which refutes the myth that the life companies are actively seeking loans. If they are, it doesn’t show up in the data.

Another tidbit of information from the sales activity that you may find of interest is broker representation.

Of the 59 transactions, 48 identified the broker’s involved; eleven did not provide sufficient information to know if there was broker representation in the transaction. But of the 48 transactions that provided information on broker involvement this is how it broke out:

	Both sides represented	29	60%
	No buyer's broker	11	23%
	No brokers involved	8	17%
		48	100%

In other words, there were 69 paydays (29 x 2 + 11) for the brokerage community in the first half of 2010. It will be interesting to compare 2011 transactions with this year’s sales activity.

A year from now will we look back and see that we have turned a corner? For all of our sakes, I hope so.