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2009:Linwood
Thompson: The Bottom is Close
By Jerry Ascierto
The bottom of the single-family housing market is near, and the
apartment industry is well positioned for a strong recovery, said
Linwood Thompson, managing director of Marcus & Millichap, in his
annual Apartment Industry Forecast at the recent Apartment Finance
Today Conference.
But the multifamily industry’s recovery likely won’t come until the
end of 2010, as the shadow rental market and job losses continue to
depress vacancies and rent growth.
An uptick in single-family housing sales in the past month, driven
in part by the $8,000 first-time homebuyer tax credit, is a positive
first step. “We’re probably close to the bottom, and I think we’re
already there,” Thompson said. “The question is, ‘How quick is the
climb out of the trough once we hit the bottom?’”
Thompson forecasts the national vacancy rate to rise another 2
percent, approaching 9 percent by the end of 2009. And effective
rents will decrease nearly 4 percent nationally, as concessions
become the norm in many markets.
The transaction market will remain stalled as the stalemate between
buyers and sellers drags on. Owners, who see long-term value in
their assets, are not accepting the deep discounts many buyers are
expecting. But buyers are emboldened by the short-term pressures in
the economy, which are driving apartment values down.
“The short-term crowd thinks they’ll be able to buy 50 cents on the
dollar without risk,” Thompson said. “But for deep discounts,
they’ll find it’s a relatively risky environment.”
More distressed assets, especially those financed through aggressive
commercial mortgage-backed securities (CMBS) loans, should start to
trickle into the market in the second half of 2009. But unlike the
days of the Resolution Trust Corp. (RTC)—a government program in the
early 1990s that sold off troubled properties after the Savings &
Loan scandal—these distressed assets will take a while to hit the
market, since they feature more complex capital stacks than those
the RTC handled.
Values will take a beating for the foreseeable future. Cap rates for
Class A assets in primary markets have seen a decline of 65 basis
points (bps) in the past 15 months, while C-class assets in
secondary markets have declined 150 bps in that time. Cap rates
should decline another 50 bps on average by the end of 2009,
Thompson predicts.
“The price to clear the market is a 20 [percent] to 25 percent
discount, and sellers aren’t accepting that,” Thompson said.
There are some silver linings, though. Demographics, led by the echo
boomers and increasing immigration, favor the multifamily industry’s
long-term health. And there will be fewer units to house these
populations, considering that the industry added just 1 percent of
new product annually in the past decade, and construction starts are
so low now.
“Even as we see high levels of future demand coming, supply will be
more difficult and expensive to deliver,” Thompson said. And the
future of multifamily production will be characterized by a shift
into city centers. “Urbanism and density are the trends that are
going to shape the next 30 years,” he predicted.
In all, while 2009 and 2010 will be rough, “when the dust settles
and we come out of this, multifamily will be very solid,” Thompson
added.
For a copy of Thompson’s presentation, which includes a wealth of
market-specific and national data, visit www.aptfinanceconf.com.
HousingFinance.com
