Apartment Research Remains at Odds

Is the health of the apartment market improving or stubbornly weak? Two recent industry reports offer conflicting views. According to New York-based Merrill Lynch & Co. Inc., battered apartment real estate investment trusts (REITs) are showing no signs of recovery in 2004, and even if significant job growth were to occur immediately, any meaningful impact wouldn't be felt until 2005.

Merrill Lynch announced in January that it was lowering full-year funds from operations (FFO) estimates by 2.2% in 2004 and 3.4% in 2005 for nine apartment REITs it covers. The research firm indicated that housing supply will outstrip new household formations by 336,000 units this year. “Things aren't getting incrementally worse for the apartment companies, but they are not improving as much as we had hoped,” says Merrill Lynch analyst Steve Sakwa.

But a survey of National Multi Housing Council members conducted in January indicates the apartment sector is on the mend. The survey recorded its best quarterly improvement in nearly five years. The survey of 62 CEOs and other senior executives from the apartment sector who serve on NMHC's board and advisory committee measures real estate fundamentals, sales volume and availability of equity and debt financing.

It was the first time all of the survey's four indexes edged above 50, which means more respondents saw conditions improve rather than worsen compared with the previous three months.

“That means things are getting better. It doesn't mean they're great,” says Mark Obrinsky, chief economist for the Washington, D.C.-based association, who acknowledges “many different views out there.”

“Our survey really is pointing to improvement that perhaps some of the other analysts are not looking at, or are not seeing,” says Obrinsky. “In a way, it's intended to give us a sense for where the turning points may be.”

Why isn't there greater consensus in the marketplace on the state of the multifamily sector? “Right now it's pretty fuzzy out there, and you're going to see a lot of people with different opinions,” says Ed Hurley, head of Charlotte, N.C.-based Wachovia Corp.'s multifamily lending program.

David Stockert, president and CEO of Atlanta-based apartment developer Post Properties, points out that whereas the Merrill Lynch reports are based on hard numbers, the NMHC produces an opinion-based survey.

“We're in a period now where we're nearing an inflection point, and that's why you've got some varying opinions out there,” Stockert explains. He views 2004 as a stabilizing year and 2005 as ripe for recovery. “The dynamics are taking shape to be good for apartments.”

Boston-based Property & Portfolio Research doesn't expect rent growth until 2005, at which point the average growth nationally is forecast to be 2.7% per year through 2008. With vacancy rates near the historic peak at 7.2%, the market is so overbuilt that recovery is going to take a while, says PPR real estate analyst Suzanne Mulvee.

“If the job growth doesn't materialize,” warns Hurley, “it will be longer, slower and more painful to recover.”


Experts say rents will stabilize and concessions will burn off this year and into 2005. That's good news for some markets, like Atlanta, where rents have dropped from $791 per unit in 2000 to $726 as of the third quarter of 2003.

Net Effective Rents
2000 2001 2002 3Q 2003
Atlanta $791 $779 $749 $726
Boston $1,460 $1,491 $1,464 $1,471
Chicago $894 $902 $890 $884
Dallas $698 $706 $687 $670
San Francisco $1,861 $1,627 $1,460 $1,425
Source: Reis and Merrill Lynch

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