Fall 2011 issue of Horizons

Indeed, 2010 did not disappoint. Despite relatively minimal increases in job creation and the ever- present high unemployment rate, the apartment industry demonstrated a healthy recovery in 2010. While employment conditions have not improved greatly from 2009, a shift in the view of the typical “rent versus buy” scenario has begun to take hold across the country. As permanent financing has become more cumbersome to obtain and certain incentives, such as the homebuyer tax credit, have expired, many young professionals are beginning to see renting as a viable option in today’s market. Slight interest rate increases and rises in downpayment requirements have also contributed to this trend. Likewise, those homeowners displaced by growing foreclosures have entered the rental arena, creating much more demand across the country. Overall, the 2010 homeownership rate dropped approximately 2.3 percent from 2009 levels. According to economists, every 1 percent drop in homeownership equates to more than 1 million in new renters. And, with 2010 showing a decline in apartment project completion, supply has been stagnant across the industry, leading to industry opportunities in the future. Given the rising interest in renting, pricing power has also returned. While the latter quarters of 2010 began to see this effect, the impact will be more noticeable in 2011. In fact, gross rents are anticipated to increase 3.5 percent next year. Coupled with the lowest vacancy rates expected in years, a significant boost in effective rents is anticipated through 2011. According to a Wall Street Journal article published earlier this year, first quarter 2011 vacancy rates stood at 6.2 percent, down from 8 percent the previous year, resulting in the strongest first quarter in the last ten years.

As tightened credit markets delayed or, in some cases, halted development activity into 2010, apartment owners and developers are now beginning to ramp up construction in an effort to chase the rising demand. However, 2011 project completion is expected to fall 46 percent below 2010 numbers given the effects of the construction cycle and timing. In the meantime, apartment owners can expect to keep occupancy high and cash flow strong through superior property management, apartment upgrades and attractive amenities. For instance, many of the repairs and upgrades previously stalled due to weakened market conditions are now being completed to enhance property values and appeal. In addition, promoting property location and access to surrounding communities has proven to give some apartment complexes a competitive edge.

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