Apartment buildings are among the strongest sectors in the 2012 real estate market. With falling vacancy rates and ongoing rent increases, the outlook is positive.
The Burst of the Housing Bubble Benefits the Apartment Market
One important factor in the growth of this real estate sector is the burst of the housing bubble. Consumer suspicions that weak housing values make rental a safer choice for the near term—along with foreclosures that convert more people from homeowners to renters—benefit the apartment market.
Now we are seeing data that confirm a strong outlook for apartment property ownership. On March 28, 2012, the Urban Land Institute (ULI) released its Real Estate Consensus Forecast through 2014. Thirty-eight leading economists and real estate analysts look for gains in broad economic indicators, benefiting all segments of the real estate market.
Future Trends and Predictions
The survey anticipates total returns for the apartment sector of over 12% this year (but declining to 8.8% in 2013). Vacancy rates were at an impressively low 5.2% in 2011, declining only slightly to 5% this year. Future trends in the supporting data are also reassuring, with vacancy rates projected at 5.1% in 2013 and 5.3% in 2014. Rates are predicted to increase by 5% in 2012, tapering off to 4% in 2013 and 3.8% the following year.
The National Council of Real Estate Investment Fiduciaries (NCREIF) in mid March released its latest NCREIF Property Index (NPI). It collects performance data on four property types and breaks the data down further into 13 subtypes, including three apartment subtypes (garden, high-rise and low-rise).
Ten-year returns for apartments (8.0%) are almost identical to the composite figure for all property types, with low-rise outperforming at 8.6% and garden slightly above the overall number at 8.2%. The high-rise apartment subtype lagged at 7.6%. (Retail is the winning property type over 10 years, with retail-super regional mall leading all subtypes at 12.4%.)
The NCREIF data also examine the marketplace in terms of risk, using 10 year return and 10 year standard deviation figures to calculate the volatility of returns. NCREIF explains the return divided by the standard deviation as “a simplistic way to calculate how many units of return per unit of risk.”)
These data show that not only does the apartment sector perform similarly to the overall commercial real estate market, but the same is true in terms of risk. The 0.67 ratio for apartments (over 10 years) is quite similar to the 0.69 ratio overall NPI figure.
In summary, the outlook for the apartment industry is positive, in terms of both statistical projections and demographic trends..
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