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Real estate has been among the hardest hit—and the slowest to recover—of the industries impacted by the Great Recession. But one side effect of the hobbled housing market was a strengthening of the apartment market as shell-shocked homeowners fled into rentals.
“The multi-family market weathered the storm really better than most markets,” says Craig Burton, a principal with Apartment Realty Advisors (ARA). And as the economy improves, the market seems primed to continue its growth trajectory.
“The market has recovered and has recovered nicely,” he says. “We don’t see precipitous growth, but a continuation of steady improvement.”
A Rental Lifestyle
The high foreclosure rate for single-family homes is one of the biggest factors that has increased demand for multi-family units. But the multi-family segment also got a strong boost from a convergence of several recent trends.
Greg Ratliff, vice president of the NAI West Apartment Properties Group, notes that young people face a different world when it comes to home ownership. Many are daunted by the minimum credit score requirements that banks are now demanding for mortgage approvals. Add to that a large student loan burden and the difficulty of amassing a down payment, and homeownership can seem unattainable.
Beyond those hurdles, the younger generation has a different perception about home ownership. They witnessed the peak of the housing market frenzy—and the fallout from the crash. Many saw their parents’ homes lose value, even go underwater. They ask, “Why should we get on that train wreck?” says Ratliff.
He also notes that “apartment living is becoming far more acceptable than it was 10 years ago.” Class A apartment buildings offer amenities that would not be affordable when purchasing a single-family home. New developments boast of granite countertops, ceramic tiles, high ceilings, fitness and recreation centers, and swimming pools—things that would make a home out of reach for a first-time homebuyer.
It’s more than the recession that has people turning to rentals, says Burton. “They become this lifestyle renter that has really developed over the past three to four years.” The rental lifestyle offers the flexibility to move at will, no home maintenance or yard work, the convenience of urban living and, often, access to transit.
These trends are reflected in the data. “In Utah, the number of homeowners has been about 10 percent higher than nationally,” says Burton. But that number is changing. The percentage of homeowners in Utah has decreased from 76 to 70 percent, he says, while nationally it’s at 66 percent.
“That has contributed to the stability of the multi-family market,” he says.
Beyond the Recession
The result of the increased demand for rentals has been a tightening supply, which has driven up both occupancy rates and rental rates.
“When the recession hit in 2007, multi-family vacancies were at 4.5 percent,” says Burton. Vacancies jumped to 6.8 percent in 2008 but have dropped back down to pre-recession levels. Marcus & Millichap’s 2012 third-quarter report predicts that vacancies will fall to 3.9 percent by the end of the year.
Early in the recession, rents declined and more owners were offering concessions, says Burton. But that is no longer the case. The average rent in 2009 was $739, but that rose to $791 in 2011. Last year, the multi-family market experienced rental rate growth of almost 4 percent, and ARA is projecting similar growth for 2012.
But will a recovering economy and a stronger housing market tamp down growth in the multi-family market? Will the forces that bolstered apartments evaporate, reversing the gains of the past few years?
“We just don’t see this trend changing much unless the lending institutions are willing to lighten their lending requirements,” says Ratliff. Even the construction of new apartment buildings will not lessen the demand, he says.
And new construction is ongoing. About 1,140 units are under construction this year, says Burton, and 1,468 units were built in 2011. The market can absorb up to 1,500 new units each year without impacting rental and vacancy rates, he says, so new development seems to be right where it needs to be.
In fact, new developments often drive up rental rates in the surrounding neighborhoods, says Ratliff. “The disparity between Class A rents and existing Class B rents is pretty steep.” So if a new Class A development asks $775 for a one-bedroom apartment, and the existing Class B is asking $650, there is plenty of wiggle room for the Class B property to increase its rents.