April 8, 2009

By George Ratiu, Research Economist

The multi-family sector, while more resilient, is feeling the effects of the economic recession. Demand for apartments declined during 2008, closing the year at a much lower pace of net absorption than 2007. Vacancy rates also edged up, while rent growth slowed down.

The same can be said for investment activity, which also declined. However, on a somewhat hopeful note, the multi-family sector posted the second lowest decline in terms of dollar volume, at 62 percent. Based on the number of properties that traded hands, multi-family declined at the lowest rate, down 49 percent, on a yearly basis. In addition, at $37.3 billion in 2008, apartments also registered the second-highest total sales volume. Average cap rates increased 31 basis points through 2008, with a noticeable spike during the fourth quarter. Prices for apartment properties declined through most of 2008.

 

Regionally, on a year-over-year basis, the greatest declines in multi-family transactions were seen in the following markets:

• The Mid-Atlantic down 72.5 percent
• The Southeast down 52.0 percent
• The West down 66.8 percent
• The Midwest down 44.9 percent
• The Southwest down 54.8 percent
• The Northeast down 63.2 percent

Comparing the two multi-family property types-garden and mid/high-rise properties-reveals similar declines. During 2008, $27.7 billion of garden apartments traded hands. The figure represents a 60 percent decline year-over-year. In addition, the number of garden property transactions also fell 48 percent, to 1,602. For the better part of the year, the number of garden apartments offered for sale exceeded the number of deals closed by 30 percent. Pricing declined through most of 2008, to settle five percent lower for the year. Looking at garden apartments nationally, several markets posted gains in investment volume. In the Mid-Atlantic region, the DC/MD suburbs registered a three percent increase in investments in 2008. In the Midwest, Cleveland and Columbus saw increases of 41 percent and 5 percent, respectively. The Northeast also attracted increased investments during 2008, in Hartford (31%) and Stamford (212%). The other two markets with positive investment growth were Raleigh/Durham, NC (62%) and Sacramento, CA (13%).

Mid/High-rise properties also posted lower sales for 2008-67 percent lower than 2007, with a total volume of $9.6 billion.

The number of mid/high-rise properties traded fell 55 percent, to 453. While the average cap rate increased 41 basis points during the year, the average price per unit moved up one percent. The apparent discrepancy may be largely due to the low volume of transactions.

Regionally, there were a few metro areas that attracted an elevated pace of mid/high-rise investment activity in 2008. While Memphis registered the highest change in investment volume-283 percent-it was based on one property transaction. The second highest rise in mid/high-rise investment volume occurred in Palm Beach, where $37 million exchanged hands during the year, a 48 percent increase. The other metros with positive changes in investment volume were Atlanta (34%), St. Louis (30%), Minneapolis (17%), and Detroit (2%).

 

TOP 5 MULTI-FAMILY MARKETS BY VOLUME
Mid/High-Rise		Garden
Manhattan	$2.88B	Dallas	$1.63B
NYC Boroughs	$1.32B	Houston	$1.55B
Chicago	$0.46B	Atlanta	$1.50B
DC MD burbs	$0.46B	Seattle	$1.22B
DC VA burbs	$0.43B	Austin	$1.01B

 

Judging by volume of multi-family investments, Manhattan took again the top spot in 2008, with $2.9 billion in sales. The second market by volume was Dallas, with $1.8 billion in apartment transactions. The other markets rounding the top five by investment volume were Atlanta ($1,740 million), Houston ($1,613 million) and Seattle ($1,569 million).

Analyzing the buyer composition for multi-family space, foreign investment dropped by 98 percent on a yearly basis. Institutional investors also pulled back considerably, with investments declining 91 percent. In addition, equity and public investors lowered their investments by 81 percent and 75 percent, respectively. Consequently, the multi-family market has undergone shifts in market share composition. Private and other investors gained the most market share, with increases of 18 percent and 8 percent, respectively.

MULTI-FAMILY BUYER COMPOSITION

 

The top retail deals of 2008 include:

• Gramercy Green, New York, NY (Mid/High-Rise) - $275.0 million
• Empirian Village, Greenbelt, MD (Garden) - $275.0 million
• 814 Madison Avenue, New York, NY (Mid/High-Rise) - $191.8 million
• The Park Kiely, San Jose, CA (Garden) - $190.8 million
• Lands End II, New York, NY (Mid/High-Rise) - $170.8 million

The multi-family sector's performance in 2008 proved more resilient compared with other property types. While both investment and fundamentals weakened noticeably during the fourth quarter of 2008, investors did not rush for the exits. Based on the fundamentals, the year ahead is likely to be soft but resilient. Demand for multi-family space is projected to be higher in 2009 compared with last year. However, that will be tempered by the high pace of new space completions recorded in 2008-many of those a result of condo conversions. In exchange, vacancy rates are expected to continue their rise, and rent growth is likely to decline. However, compared with other property types, the multi-family sector displays stronger fundamentals and is likely to present a more attractive option for investors.

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

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