‘Apartment Advisor’ Forecasts Fair Weather Ahead

Dupre + Scott’s Apartment Advisor just put out their annual Review & Forecast, looking at predicted trends for the next five years and offering advice based on the past ten years. Here’s a recap of the full report.

Multifamily Housing Prices are Up

Good news for sellers–the average price for multifamily housing is up 7% from this time last year.1.2 billion dollars worth of 5-unit and larger properties have been purchased this year; that makes it the sixth-highest volume year in history. This is true even though there have been fewer than 200 sales this year (in contrast, for example, to 2005 when there were 660), due to the rising cost of buildings.

Don’t Underestimate your Costs!

Capital expenses averaged $750 per unit in 2010, but “investors typically budget an annual replacement reserve ranging from $250 to $350 a unit.” Typical replacement reserve budgets include appliances, water heaters, window coverings, carpeting, perhaps roofing…but people should also be budgeting for decks, parking lots, cabinetry, windows, water lines, plumbing, and more.

Another cost to factor in is credit loss. Even in strong rental markets, the long-term economic cost of rent concessions and credit loss is an issue (in 2007-2008, credit loss was at 0.6%). Credit losses should be included in buyer expense budgets, but usually aren’t.

Demand for Units is Rising

According to Conway Pedersen Economics, our region will add 170,900 jobs in the next five years. While this isn’t as high as the number of jobs added between 2003 and 2008, it’s still a strong number. Based on both that number and the projected influx of 20-34 year old new renters, there may be demand for 27,000 additional rental units in the next five years.

And some Really Good News:

Market vacancy went up by almost 1% (from 4.6 to 5.3) between March and September, but is expected to fall through 2012 to about 4%. Based on vacancy, rents should climb 6% in 2012 after climbing 4.5% in 2011.

Net Operating Income (NOI) should climb 20% in the next five years, despite being dinged by rising vacancy and conessions in 2013-2014.

We have positive financial leverage again. This means cap rates are higher than interest rates, which allows for cash flow. We haven’t seen positive financial leverage since before 2005, so enjoy!

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