Is the Apartment Market Back? Ironically, Current Conditions in the Housing Market Are Undoing a Bit of the Damage Done to the Apartment Market in Recent Years by Renters Fleeing to Become Homeowners. Now, with House Prices Drastically Up and Interest Rates Starting to Climb, Apartments Have Regained Some of Their Appeal

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The nation's multifamily housing market is continuing to gather strength as the home-buying and condo-conversion markets cool in the wake of higher costs and rising interest rates. [??] The consensus is that significant improvement has occurred on a market-by-market basis for apartments, even though some pockets remain weak. [??] At the bullish end of the scale is the view offered by Washington, D.C.-based National Multi Housing Council (NMHC). The group reports that apartment market conditions are continuing to improve, although the record-level sales transactions of 2005 may cool a bit. [??] In a February 2006 survey, the NMHC said fully 70 percent of its respondents reported improved demand for apartments, measured by lower vacancy rates, higher rents or both. [??] In an earlier July 2005 report, NMHC President Doug Bibby said the apartment market had completed its recovery. At that time, Bibby noted that economists generally distinguish between the recovery phase and the expansion phase of an economic cycle. Deeming the apartment market "recovered" nationally is not meant to suggest that the industry is doing as well as it did at the height of the previous expansion in 2000 and early 2001.

Linwood Thompson, managing director of the national multihousing group in the Atlanta office of Encino, California-based Marcus & Millichap, agrees about the distinction between the recovery phase and expansion phase. But he disagrees on the point of the apartment market being in complete recovery.

"The majority of the market has turned in the right direction, but recovery is not complete. It's an ongoing process and not finished yet," Thompson says. "But if you define recovery narrowly as 'has the downward plunge and the bleeding stopped,' in that sense there is recovery." He pegs the national vacancy rate at 6.5 percent in late 2005, compared with 7.1 percent in late 2004.

John Cannon, senior vice president and managing director of Horsham, Pennsylvania-based GMAC Commercial Mortgage Corporation, sees modest recovery nationally, but points out there are still weak pockets on a market-by-market basis.

"Landlords have cut concessions, and there's been a reduction in supply," Cannon notes. "In addition, condo conversions and increases in interest rates have stemmed the tide for single-family home purchases. Supplies may increase, though, because many condo owners will be forced to put units back on the market as rentals."

See varying recovery

Keith Misner, senior managing director in the Washington, D.C., office of New York-based Cushman & Wakefield, agrees that the apartment market is improving, with varying degrees of recovery in cities and submarkets.

"The market is getting closer to equilibrium, and jobs growth helps," he observes. "Economic expansion is having a positive effect on the fundamentals of apartment rentals."

Kenneth Danter, president of The Danter Company, Columbus, Ohio, national real estate consultant, sides with Misner that the market has recovered to some degree, but recovery is still under way. "Recovery has been more at the class-A high end than the low end," he says. Danter puts the national vacancy rate at 9 percent to 11 percent in third-quarter 2005.

Jamie Woodwell, senior director of commercial and multifamily research at the Mortgage Bankers Association (MBA), Washington, D.C., says recovery is still in the early stages. "Vacancy rates peaked at the end of 2003, and we've seen good, steady progress since then," he says.

"Development of new units has remained tame, and condo conversions have led to a decline in supply in some markets. With household growth, more demand is expected," adds Woodwell.

The widespread effects of Hurricanes Katrina and Rita have been well-documented, but what impact have the storms had on the national apartment market?

Most sources agree there's been significant local and regional impact on areas hit by the storms and also on major target cities for evacuees, but no major effect on the overall apartment market. …

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