Multi Housing News July 2012 : Page 18
fi nance & investment The Multifamily Market Cycle What at-large economic trends mean for the apartment industry By Philip Shea, Associate Editor L ong-term fl uctuations in the economy are something most income earners, business operators and investors are accustomed to seeing. Periods of ex-pansion and contraction, recession and recovery are well-registered dynamics in both the market and society overall. Yet what is less universally apparent is how these large-scale cycles trans-late into individual market cycles, and it’s safe to say that multifamily holds many unique responses to what oc-curs in the overall economy. David Mortenson, senior associate at Colliers International’s Seattle of-fi ce, states that since the development timeframe typically runs from two to three years, there is often a rift between at-large economic trends and construction in the apartment industry. “Often, the pipeline is fullest just as the rental market starts to decline,” says Morten-son. “In Seattle, for example, there were more deliveries in 2009—the fi rst full year of the re-cession—than there had been in the previous 10 years. That is because those projects were announced when the market was peaking in 2007. So while announcements for new devel-opment projects stopped immediately when the market turned, delivery of new product did not actually stop until 2011.” Dave Schumacher, senior vice president at Colliers International’s Seattle offi ce, elabo-rates on why construction pipelines tend to fi ll up before recessions and how the ensuing recovery is negating what had been an over-saturation of supply. “Developers, in general, keep developing until they can’t develop, and usually they can’t develop because lenders won’t give them money, markets become overbuilt and the equity and fi nancing dries up,” says Schum-Courtesy: Colliers International acher. “So the Great Recession, on a national basis, pretty much stopped all multifamily de-velopment, and now it’s a brisk market again.” Steve Bram, principal and managing direc-tor at George Smith Partners, remarks on the paradoxically positive effect the Great Reces-sion had on the apartment industry, setting it apart from what recessions typically do. “During the recession, demand for apart-ments decreased because people doubled up on housing, but then as the recession contin-ued, people were fi nding it hard to afford their homes,” says Bram. “As people were evicted from their homes as a result of the Great Re-cession, [they] became renters again, and de-mand began to increase for apartments.” Subsequently, after a slowdown in develop-ment over the last couple of years—the result of excess inventory at the onset of the reces-sion, Bram notes that construction is begin-ning to pick up again in major markets, signal-ing an expansion of the overall market. “New development is already increasing right now at a very brisk pace, and that’s be-cause for the last year to six months, there’s been an anticipation of an increase in rents, and that increase in rents has begun to occur in a big way,” says Bram. “Of course, the capi-tal is available because the lenders understand that the net yield is increasing as a result of reduced occupancy and increased rents, so the capital is going to the safest place, which is apartments right now.” Schumacher agrees that increasing rents and higher occupancy is what’s driving re-newed development, signaling that the mul-tifamily market is in a period of considerable recovery while also noting a new dynamic in post-recession growth for the industry. “The rapid rise in rents with low vacancy 18 July 2012 | Multi-Housing News
Finance: Market Cycles
Analysts look at the effects of macroeconomic trends on multifamily market conditions
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