Economy Wobbles but Multifamily Remains On Course

Dec 22

Written by: THE CABOT GROUP
12/22/2011 11:35 AM  RssIcon

 

Submitted by J. Debes
While sovereign debt concerns and a slow growth cast a pallor over the state of the general economy, the commercial real estate (CRE) market, particularly multifamily housing, continues to shine.

Several factors account for the resiliency of the multifamily market:
  • Weak home sales resulting from changing attitudes towards home ownership and tighter lending standards have resulted in home ownership decreasing from 69% to 66% on a national average, with each percentage point equating to roughly 1M renter households.   
  • Recent job growth heavily favors the prime renter demographic of persons ages 20-29.
  • New apartment construction in recent years has greatly diminished, not even keeping pace with inventories lost to obsolescence. 
  • Echo Boomers (born 1977-2001), numbering some 80M, have begun to enter the rental market. 
Multifamily community in Rochester, NY
As a result, vacancy rates have fallen nationally to their lowest levels since mid-2007, while effective rents have grown for five consecutive quarters.  In its 2011 Mid-Year Review, Red Capital reported average growth of 2.4% on an annual basis in markets it monitors while MPF Research reported annual increases of 4.2% for the markets it monitors. Many analysts expect continued moderate growth in effective rents for the next 2 to 3 years.  The 2011Q3 Spotlight on Commercial Real Estate from the Federal Reserve Bank of Atlanta pegged multifamily CRE in the upturn of the current market cycle.


Fueled by strong fundamentals and fear of a turbulent stock market, many investors have sought the relative safety of the commercial real-estate markets, particularly assets in primary markets.  Housingfinance.com quoted Dan Fasulo of Real Capital Analytics as saying that "cap rates are approaching all-time lows" and that he "would not bet that cap rates are going higher any time soon". 
THE CABOT GROUP experienced strong fundamentals in the Upstate 201 York and Treasure Coast of Florida, with effective rent growth far surpassing national averages.  A lack of transactions in these markets makes it difficult to provide cap rate benchmarks however based on discussions with national brokerage firms, the likely cap rates for  these markets should range from 7.5% to 8%.

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