CREJ - Multifamily Properties

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Page 12 — Multifamily Properties Quarterly — January 2015
A prominent question fac-
ing the apartment industry
is, “Can we absorb all of
the new apartments being
built?” Followed by, “If not,
then what will happen?” Looking
back, we can see
that absorption
varies tremen-
dously from year
to year, so any
forecast is likely
to be slightly to
highly inaccurate.
The accompany-
ing chart shows
just how variable
apartment absorp-
tion has been in
the Denver metro
area over the past
30 years, from neg-
ative 2,700 units
in 2001 to positive
8,500 units only two years later, an
11,200-unit swing.
There is often a correlation
between increasing absorption and
increasing new supply. This makes
sense from a couple of perspectives.
First, apartments typically are con-
structed when the local economy
is doing well, jobs are being created
and population growth is accelerat-
ing from in-migration. So, absorp-
tion should be higher when apart-
ments are being built, if they are
built at the right time. Absorption
is also higher when a large sup-
ply of new apartments is added,
because new apartment buildings,
unlike office buildings, for instance,
do not sit empty in the absence of
adequate new demand. Rents get
reduced, initially in the form of
increasing concessions, until the
desired absorption rate and final
occupancy level are achieved. If
there is inadequate demand, resi-
dents look for new properties and
are pulled away from older proper-
ties, resulting in overall vacancy
increases across the market.
Older properties then react by
offering concessions or reduc-
ing rents to achieve their desired
occupancy. The resulting lower rent
levels make apartments afford-
able to more people, expanding
demand. This expansion occurs
because roommates can now afford
their own apartment, and more
adult children living at home can
afford to rent an apartment. In this
respect, supply can create its own
demand. But if new supply is exces-
sive, vacancy also will increase and
rent growth will decline, eventually
turning negative if vacancy gets
high enough.
Note in the chart that there was
very strong absorption during 2003
and 2004, a period of high vacancy,
but very low levels of new con-
struction. Similarly, 2010 achieved
strong absorption with no obvious
reason (the economy was weak at
the time), other than possibly the
fear from the financial meltdown in
2008 had subsided, the only other
year with negative absorption. Rent-
ers seemed to emerge from their
parents’ basements and ventured
out to rent a place of their own,
often with their parents’ financial
support.
Looking back, absorption has
averaged slightly more than 4,000
units per year over the last 30-plus
years, and just over 5,000 units per
year going back 50 years. But it has
almost always been either higher
or lower in any given year – rarely
at the average level. Current con-
ditions support higher rates of
absorption, supported by above-
average job growth, strong popula-
tion growth – particularly in the
typical renter age group – a limited
supply of new affordable housing
(think condos and townhouses) for
sale and limited financial means for
large segments of the population
(flat incomes, high student debt,
lack of a down payment, a need to
be mobile for the job market). Given
these positive factors, my original
absorption forecast for 2014 was
6,000 units, 50 percent above the
30-year average. This turned out to
be low, as slightly more than 7,000
units were absorbed in conventional
rental communities with 50-plus
units (from an inventory of 177,000
rentals), and just over 8,000 units
were absorbed, including both con-
ventional and affordable properties
(taken from the Apartment Insights
survey of over 200,000 units each
quarter).
While 2014 was an extraordinarily
strong year for absorption, it seems
likely that a similar number could
be achieved again in 2015, as little
on the demand side has changed. It
appears that even more apartments
are likely to be built this year than
last. Rents now are at even higher
levels, and the volume of new for-
sale housing is steadily increasing,
which could arguably slow absorp-
tion in the coming year. Either way,
2015 absorption is likely to be below
the 9,200 new apartments added to
the rental pool during 2014, and the
11,000 units expected to be com-
pleted during 2015. This assumes
there is enough available labor to
complete them. This gap between
supply and demand should push
vacancy rates higher, particularly
in submarkets with heavy con-
centrations of new construction.
The expected result is slowing rent
growth. Since metrowide rents grew
by an astounding 12 percent last
year, there is plenty of room for
rent growth to decline and yet still
be positive.s
Apartment Insider
Cary Bruteig,
MAI
Principal,
Apartment
Appraisers &
Consultants,
Denver
Source Apartment Appraisers & Consultants, Inc.
Apartment absorption rate over the last two decades
of opportunities in the marketplace.
The majority of the $200 million
trading hands in the second half of
the year came through two portfolio
sales. One comprised McWhinney’s
sale of three properties (two in
Loveland and one in Westminster)
and the other was made up of three
student-housing properties sold in
Fort Collins by Walnut & Main.
Overall, 2014 was a fantastic
year for the multifamily market in
Northern Colorado. Owners and
managers were able to fill their
properties with eager tenants.
Rents continued their climb while
vacancies continued to be minimal.
Sellers were able to maximize the
values in their properties through
extremely low cap rates and never
before seen demand.
With rental rate increases far
exceeding inflation, 2015’s activity
will be watched cautiously with the
anticipation of pricing and vacancy
leveling off. With inflation meekly
increasing somewhere between 1.6
percent and 2 percent, combined
with very high housing prices, I
expect to see continued excellent
performance on the operational
side of the multifamily market
along with stabilized rents and
moderate vacancy.s
If new supply
is excessive,
vacancy also will
increase and rent
growth will decline,
eventually turning
negative if vacancy
gets high enough.