Apartment Fundamentals on the Rebound

The occupancy rate across Camden Property Trust's apartment portfolio reached 94.3% in the first quarter, up from 91.4% a year earlier. Executives at the Houston-based apartment real estate investment trust (REIT), which owns 51,344 units, welcomed the improvement.

“We are starting to see increasing demand,” says Richard Campo, CEO of Camden. “More people are walking in the door to ask about apartments.”

After struggling for three years, many apartment markets around the country are seeing a revival. In March, the national occupancy rate was 93.8%, up 0.9% from the year before, reports M/PF Research.

Some markets enjoyed particularly sharp growth. In Charlotte, N.C., occupancy rates jumped from 89.4% in March 2003 to 93.1% this year. San Francisco gained more than 3 percentage points.

Until recent months, occupancy had been falling as unemployment climbed. Then in late February, companies began reporting an increased flow of renter prospects, according to M/PF. By the end of March, rent rolls were clearly improving.

Why the Tide Is Turning

Rents had begun to soften in the fall of 2001. The weak market was made worse by record-low interest rates, which encouraged potential renters to buy their own homes. The rate on 30-year mortgages dropped as low as 5.23% in June 2003, according to the Federal Reserve.

But now trends are moving in favor of apartment owners. According to the Federal Reserve, mortgage rates moved up to 6.27% in May 2004, a level that will make homeownership too expensive for many people. At the same time, expanding job markets will help more low-income people afford apartments.

The Department of Labor reported that in May non-farm payrolls increased by 248,000. That report followed jumps of 346,000 jobs in April and 353,000 in March. In May, the total number on payrolls reached 131.2 million, up 1.4 million from the low that was reached in August 2003.

Along with occupancy rates, rents are climbing. For the country overall, effective rents rose 0.3% in March from the year before, reports M/PF. But the advances are not uniform. In hard-hit areas in Silicon Valley, such as San Jose, rents dropped.

With continuing construction in many areas, demand must outstrip supply before rents can rise substantially. Meanwhile, many owners report that they must still offer discounts and concessions in order to win tenants. “People have been conditioned to ask about the discounts before they will consider an apartment,” says Campo.

Investors Undaunted

Despite the market turbulence, investors have been clamoring to buy apartments. In the first quarter of 2004, sales of apartment properties totaled $6.8 billion, up 30% from the year before, according to Real Capital Analytics. Prices climbed sharply with the average garden apartment selling for $104,266 per unit, up from $86,909 a year earlier. The average capitalization rate dropped to 6.2%, down from 7%.

Washington, D.C.-based Carlyle Realty Group helped push up the average figure when it paid $246,594 per unit for Constitution Quarters, a 367-unit project in Charlestown, Mass. In another deal, Rochester, N.Y.-based Home Properties paid $122,917 per unit for Wellington Trace, a 240-unit garden complex in Frederick, Md.

Private investors have been among the most active buyers. They have taken advantage of low interest rates to borrow heavily and bid up prices. In the past year, acquirers could borrow at 5% and purchase properties with initial yields of 7%.

“If rates keep rising, you will see leveraged players pulling back later this year, and prices will soften,” says Ray Owens, managing director of acquisitions for Atlanta-based Wells Real Estate Funds.

Strategic Moves

Still, many acquirers plan to stay in the market. In the first quarter, Home Properties paid $140 million to buy 1,278 units in seven communities. Specializing in suburban garden apartments, the REIT plans to spend another $100 million on acquisitions this year. It is focusing its portfolio on high-barrier markets, including Washington, D.C., Boston and New Jersey.

Camden, meanwhile, has sold units in Dallas and Las Vegas and developed properties in Southern California. The company recently completed Camden Harborview, a 538-unit community that is 300 yards from the ocean in Long Beach, Calif. “It is very difficult to build in Southern California,” says Campo, “and that helped the area hold up better during the recession.”


Metro Area March 2004 March 2003 % change
Charlotte, N.C. 93.1% 89.4% 3.7
San Francisco 96.2% 92.8% 3.4
Chicago 94.8% 91.9% 2.9
Tampa 94.4% 91.5% 2.9
Orlando 94.1% 91.2% 2.9
Las Vegas 95.2% 92.3% 2.9
Miami 97.7% 95.0% 2.7
Source: M/PF Research

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