Apartment market still showing strong fundamentals

While other commercial real estate markets continue to struggle, the multifamily sector has proven to be most resilient by delivering better returns during economic downturns. According to Torto Wheaten Research's report prepared for the National Multi Housing Council, A Case for Investing in U.S. Apartments, apartment investments outperformed other real estate sectors during the 1990-91 recession, as well as for the five-year periods that began with the 2001 and 1980-81 recessions. Multifamily is an attractive investment option for buyers with a lower risk tolerance, which can be explained by several factors. According to the report, apartments generally have more consistent demand than other property types, as well as shorter leasing cycles. Apartment buildings also have a shorter development cycle, averaging 12 to 14 months. The rental market for apartments is consequently much more responsive to price changes, keeping price levels close to equilibrium. In contrast, the office sector is more volatile due to its longer lease structure (5 to 10 years) and longer building cycle (18 to 30 months), making it more vulnerable to overbuilding. In addition, the multifamily industry has had stable access to debt, due to the Government Sponsored Enterprises' (GSEs) Fannie Mae and Freddie Mac. Their share of multi-housing residential mortgages grew substantially over the past decade and their capital has become a reliable source of liquidity for the industry as a whole. This consistency of debt availability results in a generally favorable cost of capital over time. Unlike other commercial real estate, apartment rents adjust fairly quickly to market changes. Other property types, such as office and industrial, can take years for the same adjustments. This advantage makes it relatively easy to value and finance apartments compared to other property types. Such a relatively broad playing field provides investors with potential for geographical and product diversification and allows owners to devise and implement various investment strategies to suit their needs. In addition to traditional market-rate apartment properties, there are also specialized segments of multi-housing for seniors, students, and low-income households - all of which are gaining attention among investors searching for new "niche" sectors. Overall rental demand will continue growing rapidly over the next five years, Torto Wheaten Research reports, supported by favorable trends among rental cohorts. Growth in population aged 20 to 29 - the group with the highest propensity to rent, or "prime renters" - is resuming after two decades of decline. Meanwhile, growth in renter population aged 50 and over is strong now, despite their historically high home ownership rate. The group is now contributing more to rental demand than even the so-called "prime renters." Moreover, a trend toward "lifestyle renting" among the middle-aged households has also emerged as one of the forces enhancing renter demand recently. Additionally, steady foreign immigration and an increasing diversity of the U.S. population are two long-term trends that are expected to continue to materially benefit broad rental demand. Ken Fazio is vice president, national sales manager for Arbor Commercial Mortgage, Uniondale, N.Y.