Smart Business spoke to John Leonard, first vice president and
regional manager of the Atlanta office of Marcus & Millichap Real Estate
Investment Services, about what to expect in the national and regional
Some sectors of the
commercial real estate market have shown signs of recovering. For investors
interested in returning to the market, which sector is poised to make the
greatest strides as we head into 2011?
The multifamily sector is positioned ahead of the
office, industrial and retail sectors, even though the industrial property
sector has started to recover as a result of U.S. manufacturing gains. U.S.
apartment fundamentals have strengthened this year as a result of many factors,
including the release of pent-up demand, moderate private sector job growth,
single-family home foreclosures and homeownership hurdles facing many
U.S. apartment transactions accelerated during the
second quarter, hitting the highest level since late 2008. Increases were
driven largely by the $5 million to $10 million and $20 million to $40 million
segments, as larger private investors and REITs/institutions moved off the
sidelines. Investors have begun to accept that a wave of deeply discounted,
distressed opportunities may never materialize. At the same time, financing
constraints eased, as the agencies and life insurance companies became more
aggressive in their pursuit of high-quality deals. With a significant amount of
capital previously earmarked for distressed deals now targeting stabilized
assets, competition for deals has increased and cap rates have started to contract
for higher-quality properties. On average, cap rates dropped 10 basis points
this year to 7.3 percent, while per-unit prices rose 9 percent to $83,600.
Apartment vacancy dropped 20 basis points to 7.8
percent during the second quarter. Approximately 46,000 apartments were
absorbed, the strongest demand since late 2000. During the first six months of
the year, 10 metro areas accounted for 55 percent of the absorption recorded
nationwide; combined, these markets added 212,000 jobs, equivalent to approximately
one-quarter of all positions created in the United States during that time.
How is the U.S. apartment market performing
compared to other sectors?
During the second quarter, rents increased and
concessions declined for the second consecutive period. Asking rents rose 0.4
percent to $1,021 per month, while effective rates gained 0.6 percent to $946
per month. Concessions peaked late last year at 7.8 percent of asking rents, or
slightly more than four weeks of free rent on a one-year lease, and have since
slipped to 7.3 percent of asking rates, still well above the long-term average
of 4 percent. Despite regaining some pricing power, owners will likely wait
until 2011 to raise rents more substantially, instead focusing on attracting
tenants and filling vacant units.
Former homeowners are also moving into rental units as
a result of home foreclosures. At the same time, tight lending and high down
payment requirements preclude many renters from purchasing homes; as of
mid-2010, just 8 percent of residential mortgages originated allowed for down
payments of less than 10 percent, compared to 29 percent in 2007. The
homeownership rate has dropped considerably in recent years as a result of
How is the Atlanta apartment market performing?
Renewed job creation and the formation of new
households will continue to stabilize the Atlanta apartment market and set the
stage for steady improvement in fundamentals in 2011. Over the remainder of
this year, renter demand will fluctuate as the private sector slowly begins to
hire workers and temporary government positions are eliminated. With job growth
remaining below pre-recession levels, rents will continue to fall, albeit at a
reduced pace from a year ago. Concessions will remain necessary to attract price-sensitive
renters and will not burn off significantly this year for most properties.
Additionally, the completion of new units will decrease from a year ago, but
lease-ups will be somewhat slow amid recovering but subdued renter demand.
Absorption of recent additions to supply will pick up next year, though, as
demand strengthens and construction slows.
Describe the multifamily investment sales market in
Atlanta. What are investors doing in Atlanta to position themselves for the
Large, institutional-grade properties will continue to
account for much of the activity in Atlanta in the near term, while the market
for performing, stabilized assets will gain momentum gradually. Stabilized REO
properties, defined as cash-flowing assets with high occupancy, have started to
trade with greater frequency in the region as lenders step up efforts to
resolve troubled loans. Offering cap rates range from 8.5 percent to 9.5
percent and mark a reversion to pricing norms that existed before the run-up in
values in 2005 and 2006.
In addition to these properties, investors remain
highly interested in distressed, high-vacancy assets that can now be purchased
at prices often much lower than the prevailing marketwide median. Overall,
investment activity will become more normal and sustainable as an economic
recovery picks up steam and bolsters the metro area’s stature as a diverse
job-creation engine capable of significant growth for extended periods.
Numerous investors purchasing assets at their current low prices anticipate
steady returns over the five-year horizon.
Over the longer term, institutions eager to place
money will continue to look to Atlanta, where a large stock of top-quality
assets provides an outlet for capital. Properties located in the core of the metro
will garner the greatest investor attention due to relatively consistent renter
John M. Leonard is a first
vice president and regional manager of the Atlanta office of Marcus & Millichap Real Estate
Investment Services. Contact him at firstname.lastname@example.org
or (678) 808-2700.
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