Apartment Blogs

 For most metros across the U.S., today's dismal apartment market performances look like bumps along a road that will lead to stronger fundamentals over the coming few years. Throughout Texas, for instance, it's hard to envision a scenario where job production doesn't crank up again during the next economic cycle, attracting additional households that will absorb the glut of apartments seen now. Diverse markets like the Bay Area, Denver and Boston, too, are examples of spots where debate about the outlook mainly just centers on the likely timing of the comeback.

Even some of the nation's apartment markets that rank among the worst performers at present simply are coping with punctured bubbles that don't seem to have permanently derailed them from long-term trends. For all its current troubles, Phoenix very well could add more jobs than any other metro across the nation during the next decade, and the resulting additional residents eventually will fill up the metro's vast excess housing inventory. In the Inland Empire, as well, the economic and demographic trends still point to a favorable future performance.

But there are other locations where it's appropriate to wonder whether long-term history actually tells us much of anything about the future. Maybe recent difficulties mark a tipping point setting the metro on its way to a role in the overall U.S. picture that's quite different from the position seen in the past.

 Contradictory signals are exhibited in the apartment sector's recent performance across many metros throughout the country. That mix of good news and bad news is especially pronounced in metro Los Angeles. Key among the factors that make the gigantic Los Angeles apartment sector so complicated is that the metro isn't in any way, shape or form a single market. Instead, it's a multitude of individual markets drastically different in terms of factors such as product characteristics, property ownership profile, and resident traits.

Let's break down some of those differences across select neighborhoods to get a feel on the variety of influences seen on LA's overall stats.

The Hollywood submarket provides as a good example of the patterns taking shape in the more urbanized areas of metro Los Angeles. After Hollywood's apartment occupancy rate got as low as 92.4 percent in late 2008, this submarket managed to post substantial demand throughout 2009, recapturing some of the renters who previously had left conventional apartments for alternative options, namely the area's meaningful stock of individually-owned condos offered for lease. By the end of 2009, occupancy was back up to 95.1 percent, certainly still below the long-term norm but dramatically improved from the year-earlier rate.

 It's an odd bunch of metros on the list of the nation's recent apartment demand leaders.

In one camp are areas like Austin and San Antonio. Those locales added lots of new supply that progressed through initial lease-up at a rapid pace during the past year. And, at the same time, move-outs from their existing stocks were held to minimal levels since recent job cuts proved comparatively mild. Austin absorbed almost 7,800 apartments during calendar 2009, and the demand tally in San Antonio reached a little over 4,400 units.

In the perhaps more surprising story, top absorption centers for the past year also include several markets that added only a few new apartments that would help stimulate leasing activity and that suffered dramatic job losses that would have drained renters from their existing apartment inventories during a normal economic cycle. What pushed up apartment demand in those areas was a resurgence of home and/or condo sales, reducing the volume of shadow market alternatives offered for rent, after those other options had captured an unusually large share of total rental demand over the previous year or two. In a pair of the most striking examples of this pattern, the Inland Empire posted demand for just over 3,700 apartments during calendar 2009, and Orlando absorbed nearly 3,500 apartment units.

Across the 64 markets that form the core of MPF Research's U.S. apartment sector analysis, revenues have come down an average of 7.7 percent since the period of national job loss kicked in at the beginning of 2008. This change is calculated looking at the shift in occupancy as well as the movement of effective rents for new leases. Typical revenues faltered by 4.4 percent during calendar 2009, with nearly all of that loss focused on rent cuts. The decline during calendar 2008 was at 3.3 percent, registering mainly in the form of dropping occupancy.

Examining change on the metro level, by far the biggest winner across the country over the past two years was El Paso, where revenues actually climbed meaningfully - rising 5.2 percent. Separating El Paso from the pack, Fort Bliss is in the midst of expansion that is directly bringing about 15,000 jobs to the metro and indirectly is creating spin-off support positions needed to serve the additional populace. (Keep in mind that job info from the Bureau of Labor Statistics excludes active-duty military personnel. Thus, while the BLS is showing that El Paso lost about 4,000 positions during the past two years, the total employment count in actuality experienced a sizable bump.

Pittsburgh was the one additional market across the country where the change in apartment revenues stayed in positive territory during the 2008-2009 time span. A mild rise of 0.8 percent registered there.

 In past analyses, MPF Research has drawn significant attention to the fact that 2009's new apartment completions have leased up remarkably well, considering the state of the economy. On net, in fact, these properties have accounted for virtually all the demand seen recently in most metros, as older projects have tended to lose residents over the past year. But what about the pricing in place for the communities finished recently?

Not surprisingly, the story is that rents are falling in the brand new stock, just as they are in the overall base of product.

Looking at a sample of 62 properties with 18,113 units where construction was completed during 1st quarter 2009, effective rents fell by an average of 4 percent during the ensuing three quarters.

 As everybody scrambles to complete their to-do lists before heading out for the holidays, let's take a moment for some jolly news. Early results from MPF Research's December survey of U.S. apartment market fundamentals show 4th quarter's performance notably surpassing expectations.

U.S. apartment occupancy normally backtracks an average of about 0.6 points between September and December, reflecting the slowdown in leasing activity that is typical at the end of the year. But in 2009, it looks like occupancy will be up a little bit on a quarterly basis, probably somewhere around 0.2 points to 0.4 points for the country as a whole. More than two-thirds of the 64 metros that form the heart of MPF Research's national coverage are exhibiting quarterly upturns in occupancy at the end of the year.

Furthermore, after operators bought demand with big rent cuts for most of 2009, pricing now appears to be moving toward stabilization. Rents still came down between September and December. But instead of slicing rates at a quarterly pace that had been averaging about 1.5 percent across the nation, it seems that 4th quarter's loss will be near 0.5 percent. There are still some markets that get big lumps of coal for the quarter ... we're looking at you Houston, Denver and Salt Lake City, for example. But in most areas, December's rents look pretty similar to September's pricing, and a few spots actually have eked out minor price upturns.

 Like quite a few other metros across the country, Seattle saw a little demand for apartments return during recent months. About 2,800 apartments were absorbed during the prime leasing months of 2nd and 3rd quarter. However, with the metro adding new apartments - including quite a few developments that began construction as condos - at levels way above the historical norm this year, occupancy continues to falter. And rent cuts are some of the deepest seen anywhere across the country.

Seattle's apartment occupancy rate registered at 92.3 percent as of September, down only a modest 0.2 points on a quarterly basis but below fall 2008's rate by a notable 2.6 points. Since peaking in early 2007, Seattle occupancy has dropped almost 5 percentage points.

Seattle's biggest blow to apartment revenues hasn't come from the loss in occupancy, however. The stunning drain on rental incomes has been the deterioration of pricing power. Average monthly rents in the metro were down to $989 as of 3rd quarter. Measuring change on a same-store basis, effective rents that incorporate the impact of widespread and deep giveaways fell another 1.6 percent between June and September. Those losses took Seattle's annual rent plunge to an even 10 percent, with the metro joining San Jose and Fort Myers on the list of markets whacking away at rents at annual paces reaching double digits as of 3rd quarter.

On net, increasing home sales numbers in the nation's housing bubble metros seem to represent good news for the apartment sector. While home sales momentum in California, Florida, Phoenix and Las Vegas does mean that a few apartment renters are leaving to make purchases, lots of the buys in those areas reportedly are being made by investors. Looking beyond who is snatching up today's bargain-priced homes, the housing sector simply has to get back on its feet in those locales for job growth to return in metros where real estate traditionally has played such a big role in the total economy. And, furthermore, rebounding home sales are helping to burn off excess inventories of housing that was intended to be for sale but that had ended up in the rental pool.

There are other spots, however, where increasing home sales translate to downside risk for the apartment market's performance, with the major metros in Texas most clearly falling into that category. Home sales activity in Houston, Dallas, Fort Worth, Austin and San Antonio isn't being stimulated by investors ... many of those homes now moving through the pipeline are being purchased by former renters. And those sales don't have much impact on the size of the shadow market rental inventory, since the shadow market never was a particularly big deal across Texas.

At MPF Research's recent Texas/Southwest Apartment Markets Conference, experts in the property management roundtable discussion said they were seeing a notable jump in the loss of residents to purchase during the past few months. And Texas home sales stats corroborate those observations. Info released this week showed Dallas preowned home sales during the month of November up 31 percent from November 2008's count.

U.S. employers cut only 11,000 jobs during the month of November, according to last Friday's preliminary estimates released by the Bureau of Labor Statistics. That figure was stunningly better than the elimination of some 130,000 to 160,000 positions that had been expected by most analysts. Furthermore, downsizing that had been reported at more than 400,000 jobs during the September-October time frame was revised to losses of about 250,000 jobs for the two-month period.

Do these much-better-than-anticipated employment numbers point to acceleration in the recovery of the nation's apartment market? Probably, with the impact likely to show up in two separate ways.

Job stats usually don't move in a straight line during the initial months of an economic shift, so it wouldn't be surprising to see monthly losses back at levels of 100,000 or more positions in the immediate future. Still, November's numbers do make it seem possible that we'll actually start creating jobs by March or April of 2010, whereas most economists had been expecting the return of positive numbers a little bit later, perhaps around the middle of the year. Whether net job formation returns at the beginning of 2nd quarter or during 3rd quarter is a big deal for the apartment market, since 2nd quarter is a seasonally strong leasing period. The addition of jobs three or four months earlier than anticipated previously could push up 2010's total apartment demand tally very significantly if the specific months in question are April, May and June. Furthermore, since many local apartment markets will see their last big blocks of deliveries in either 4th quarter 2009 or 1st quarter 2010, demand realized during 2nd quarter 2010 could boost occupancy meaningfully.

 The Boston apartment market ranked among the nation's surprisingly solid performers throughout 2009's first half. Occupancy basically held steady, and effective rents barely edged downward, despite the fact that the metro recorded quite substantial job losses. Performance stats for 3rd quarter showed occupancy still at stable levels. But for the first time in the current cycle, effective rent production took a notable blow.

Properties included in both the June 2009 and September 2009 surveys (a total of roughly 79,200 units) saw effective rents for new leases fall 2.2 percent during the three-month period. That quarterly decline accounts for two-thirds of the metro's 3.3 percent annual drop in effective pricing.

September's rents were off substantially on an annual basis across almost all individual neighborhoods in the greater Boston locale. In the two noteworthy exceptions, the North Shore/Route 1 area and the Cambridge area lost only a little momentum between fall 2008 and fall 2009. Both of those submarkets did suffer some backtracking in price positioning specifically during 2009's 3rd quarter, but prior to that they had been seeing rents inch up a little.