As ULI Sees It: Emerging Apartment Market Trends

From the coverpage of the ULI Report

Earlier this month, the Urban Land Institute put on their Emerging Trends in Real Estate forecast breakfast. Their comprehensive 92-page report can be read online in its entirety, and it’s probably worth your time; but for now, we were particularly interested in what they had to say about the apartment market going into 2013.  Based on their report, even with plenty of new development, apartment projects should be a safe bet at least through next year–we’ve got the highlights of their multifamily subreport below.

At this point, we’re all familiar with the hallmark strengths of the current apartment market–namely, demand buoyed by the rise of the millennials and the aging of the boomers, the shift in the housing paradigm brought about by the last housing bust, and the increased focus on convenience and flexibility. According to ULI, “as long as these trends continue, over the long term apartments should continue to outperform all other property types on a risk-adjusted basis, with excellent cash flow components.” 

Sounds good to us–but are there any risks? We keep hearing about all of the capital that’s been flowing into development lately, for example–as ULI puts it, “shut out of much activity in the office and retail sectors, developers of all stripes pile into the sector as lenders offer construction loans.” Surely that can’t be sustainable in the long run…can it?

But here’s the good news when it comes to the risk of overdevelopment: “Even with stepped-up activity, interviewees say unit deliveries in 2012–about 200,00–will come up short of the roughly 300,000 mark typically needed to maintain equilibrium in markets nationwide.” The fact is, there is demand for new units that even all of the 2012 construction isn’t filling–and so we’ll look to 2013 to start to take the new unit completion numbers where they need to go.

Of course, there is the risk that at some point, if interest rates are low enough and rents are high enough, buying houses may start to seem like a good idea again. But as ULI points out, we are in the middle of an urban shift. Public transportation projects are being green-lighted in cities all over the country, while developers are starting to build smaller living spaces with a greater emphasis on community space and walkability. This all means that “the “continuing urbanization” wave underway should give developers at least “a three- to four-year” window in major markets.”

So what’s the bottom line? ULI says: “…Expect the run of increasing rents and values to continue in most markets at least through 2013 and probably well into 2014.” Note that best bets are all in the urban markets–suburban, car-access rentals will not perform quite as well as their city-based counterparts. That all sounds good to us! Check out the full report here (the apartment section begins on page 50).

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