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Invest in N.H. Apartments? Maybe
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Business New Haven
2/3/2003
By: BNH
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NEW HAVEN - Apartment vacancies grew in the Elm City rental market in 2002, but a dearth of new apartment units coming on line will keep the supply of apartment units relatively tight through 2003.
That's the conclusion of the annual National Apartment Report from Marcus & Millichap Research Services, which ranks 40 apartment markets nationwide based on a series of 12-month forward-looking supply and demand indicators. The company performs the research for its investment real-estate clients.
Of the 40 markets, New Haven ranked No. 24 in the 2003 report, up nine places from a year before, due in large part to a lack of new apartment units, with few projects in the pipeline over the foreseeable future.
The healthiest apartment market in the new report was Riverside-San Bernardino, Calif., followed in order by Los Angeles, San Diego and Boston. The weakest market, according to Marcus & Millichap, was Atlanta, followed by Kansas City (Mo.) and Denver.
In greater New Haven, a “stagnant” economy and lack of population growth have kept apartment demand soft in the market, says the report. “Economic strength has been sapped, as the area continually lost jobs over the last nine quarters,” especially in the manufacturing sector, according to the Marcus & Millichap report. It noted that manufacturing payrolls retracted by more than 4,000 jobs during 2002, accounting for roughly half of the 8,000 jobs lost in the market during the year.
Also, while the market's unemployment rate remained a low 3.9 percent throughout the year, that “has more to do with a shrinking labor force than market strength,” said Marcus & Millichap.
That negative employment picture, coupled with stagnant growth in number of households (up just 530 units in 2002), drove the apartment vacancy rate up to five percent last year.
Although Marcus & Millichap attributes much of this weakness to high-end apartments, it has nevertheless affected rent growth throughout the apartment sector. Asking monthly rents rose by just three percent in 2002, to an average of $905, and are expected to grow even more slowly in the new year, rising by just one percent.
In addition, beyond the slight increase in asking rents, effective rents actually fell by three percent during the past year. In response, many owners began offering concessions in the form of free rent in order to lure prospective tenants to their properties.
The good news, according to the M&M report, is that many investors view the market lethargy as temporary and expect apartment values to keep rising in 2003, albeit at a slower rate than in recent years.
A positive harbinger that could help to reverse the lagging apartment demand, according to the study, is an anticipated increase in jobs in financial and business services. These industries are expected to add up to 4,000 new jobs over the next 12 months.
That prospect, coupled with continued low interest rates, may keep real-estate investors optimistic on the long-term outlook for the apartment market and may even spur some upward price movement in 2003.
So, would Marcus & Millichap recommend New Haven apartment complexes to its investment clients? And under what circumstances?
“The big distinction between the current market and the strong market we experienced in the late '80s is that large apartment deals are currently being underwritten on solid, verifiable operating data,” says Steve Witten, senior director of M&M's National Multi-Housing Group in New Haven. “While stabilized yields of 7.8 to 8.5 percent may not rival the stock market of two years ago, these returns surpass what is currently available in alternative investments - the stock market, money funds, etc.” Those returns, says Witten, “coupled with the perceived long-term stability of the New Haven apartment market, and reasonable, anticipated growth, New Haven is one of the most desired national markets by both institutional and private apartment buyers.”
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