Influx of Renters Drives up Value of Apartment Buildings

Investor interest in U.S. apartment buildings continued at a healthy clip as the total sales volume jumped 40% in the first quarter over the same period last year. More apartment building sales closed in the first quarter than in any quarter since mid-2005, according to CoStar Group data.

That level of investor interest for apartment buildings exceeds most commercial properties, even commercial office space.

Just under 4,000 multifamily sales transactions were recorded in the quarter at a total volume of $9.4 billion, according to preliminary CoStar sales data, compared with $6.7 billion in first-quarter 2010 and just $3.76 billion in first-quarter 2009. Despite the heightened activity, sales were just 22% of their mid-2007 market peak of $43 billion in the most recent quarter. Sales volumes declined about $6 billion from fourth-quarter 2010.

The nation's rental market is flying high as more apartment renters enter and remain in the market even as new-home sales hover near record lows.

Rents in apartment buildings have also enjoyed a nice bump. Rental prices rose 1.7% in the second quarter, taking the gain to 3.8% for the 12 months ending in June, according to MPF Research, the market intelligence arm of RealPage (RP) .

"The rental housing market is very robust," Steve Winn, chief executive of property management software provider Real-Page told IBD. "These times are probably the best I've ever seen for rental housing."

Winn told IBD he believes homeownership in the U.S. has declined 2.5% as the wave of foreclosures from the past several years has driven a "large influx" of prior homeowners into the rental market.

While the drop in the homeownership rate has led to higher absorption of apartments over the last five quarters, the pace has slowed from last year’s 167,000 units absorbed, which was the strongest level of demand since 2005. The last two quarters have seen demand of 19,000 and 23,000 units, respectively.

CoStar forecasts total supply additions of just 27,000 units in the 54 largest markets in 2011, just one-third of the pre-recession average between 2003 and 2008. However, CoStar expects to see occupancy gains in 49 out of the 54 metros over the next three quarters, led by San Antonio, Houston, Raleigh, Salt Lake City, Orlando and Portland. Markets such as Richmond, VA, Norfolk, VA, Seattle, Cincinnati and St. Louis will see modest increases in vacancy.

The limited supply of Class A and B properties continues to generate the most demand, resulting in fewer rent concessions a strong effective rent growth in 2011.

Three of the five top markets for rent growth in 2011 are in the supply constrained San Francisco Bay Area, led San Francisco (7.3%) and San Jose (7%). The East Bay, Honolulu and Boston round out the top five, followed closely by Phoenix, Raleigh, Washington, Baltimore and Denver.

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Randyl Drummer is a well known Commercial Real Estate Editor who provides valuable insights on commercial property Trends & Listings. He regularly writes about the various investment opportunities in commercial properties.