Nearly 100,000 apartment units were being absorbed nationally in the third quarter of 2010, a rate not seen since 1999 according to REIS. The renters were back in droves, apparently under the assumption that the economy is in full recovery mode. With little new supply coming on soon fundamentals should continue to improve in the sector. The new rentals pushed the occupancy rate up to 92.9% from 92.0% a year earlier.
Risks to the apartment market remain, however. Consumer confidence is still on shaky ground. Housing prices continue to deteriorate while the unemployment rate remains high. The price of gasoline is likely to stay elevated during the summer driving season, hurting the disposable incomes of renters and owners alike. There were plenty of commercial real estate loans on apartment communities made at the peak of the market and those with five year terms may cause the sector some problems going forward.
According to the PwC Real Estate Investor Survey, nationally, overall capitalization rates for apartments are currently 6.51% on average and range from 4.25-10%. This is a large decrease from a year ago when overall cap rates stood at 8.03% on average. Average marketing time is also down, averaging 6.29 months versus 8.86 months the year ago quarter. Rents are seen as growing 0.93% on average versus a negative growth rate of (0.90) one year ago.
Does it feel like we’re only fifteen percent below the 2007 peak? The Green Street commercial property index (CPPI) shows values are up 35 percent since the bottom in May 2009 and are now fifteen to twenty percent below the last peak in pricing. However, this index is weighted toward high end or trophy properties that are part of forty seven real estate investment trusts. In contrast, the Moody index shows the market fell 42.1 percent from the 2007 peak and has since recovered only 5.5 percent. The Moody index uses repeat sales of commercial properties that have sold for more than two and a half million dollars. If you’re a typical apartment owner I’m sure you feel like you’re part of the Moody index.
CoStar reports that there are 48% more distressed commercial properties today than in September of 2009. The distressed loans keep piling up and commercial foreclosures are currently 33% higher than 15 months ago (September 2009). So there is a big disconnect between the recovery in the apartment sector as compared to commercial real estate as a whole.
Marcus & Millchap’s 2010 review focused on the fact that real estate financing improved during the year and capital markets recovered. Commercial real estate fundamentals are generally stabilizing. Property values are stabilizing, and lender confidence improved during 2010. Credit spreads declined throughout the year, capital sources increased, and historically low interest rates continue.
Marcus & Millchap’s outlook for the apartment market is upbeat. They said the “Apartments staged a strong recovery in 2010 well ahead of expectations, despite modest job creation and stubbornly high unemployment.” They predict that all 44 markets in their apartment index will post positive economic growth, vacancy declines, and rent growth.
Although we are off the lows of the Great Recession, things are not so rosy. Your property tax assessment may need some adjustment even if you have received a reduction from the assessor. Do not leave money on the table. Appeal your 2011 property tax assessment and do what you can before tax rates rise.
Learn more about commercial tax appeals. Contact the expert on Atlanta area property tax appeals at www.fair-assessments.com
