Be Patient for Multifamily Recovery

Apartment properties have historically been the least volatile of all commercial investments and the first commercial properties to recover when markets improve. But this time may be different.

September 1, 2009

Gleb Nechayev, vice president and senior economist with CBRE Econometric Advisors, Boston, weighs in on his outlook for apartment properties.

Why do apartment properties generally recover first after a downturn?

NECHAYEV: Two reasons: Construction cycles are shorter so their supply can adjust faster when demand weakens. And apartments have shorter lease terms, which allows owners to adjust more quickly to economic changes and raise rents sooner.

Why is this downturn different?

NECHAYEV: Unlike the last three downturns, during which apartments were more resilient than other types of commercial property, this recession was led by housing. After 2001, the rental segment benefited from falling housing affordability and massive rent-to-own conversions. It's the opposite situation now, with falling home prices and a record inventory of vacant single-family homes and condominiums. This has resulted in the first full year of negative net absorption in investment-grade apartments since the 1980s.

What can we expect for the rest of 2009?

NECHAYEV: Given the severe job losses, we expect drops in apartment occupancy and rents. Furthermore, as home prices fall, some renters will be leaving to buy homes in the next 12 to 18 months. That will affect demand.

Does this mean that apartments are no longer a good investment during a downturn?

NECHAYEV: There's certainly going to be more volatility in apartment returns over the next two or three years, relative to what this sector has experienced historically. That said, income-producing apartment investments should still offer more stable returns than other commercial property types over the long term.

Related