Bullish On Apartments

New York City-based Maximus Advisors says the writing already is on the wall, bold and clear – more would-be home owners are turning to renting apartments as the Great Recession continues in its fourth consecutive year.This dynamic shift is going on even as “the U.S. economic recovery gathers sustained momentum and spending returns to pre-recession levels,” the real estate research and consulting firm finds.

“Fundamental shifts in consumer behavior are having lasting effects on numerous real estate sectors.”

Dr. Peter Muoio, senior principal of Maximus Advisors, states. “As we have previously predicted, the U.S. apartment market has been recovering at an astounding pace.”

“The sector will continue to benefit from the growing preference for renting over homeownership as well as rapid growth of the young adult population. We predict that vacancies will continue to decline while effective rents grow robustly during the next two years due to limited development of new multifamily properties during the recession.”

While the apartment sector rebounds strongly, the single-family segment continues to struggle.

Following the expiration of the housing tax credit, new and existing home sales floundered to an annualized 5.4 million in April, down dramatically from a peak of 6.7 million when the tax credits were in effect.

The primary cause preventing recovery in the single-family housing segment is the shift from homeownership to renting.

According to Muoio, “homeownership was previously considered to be an upward-only investment, a notion that was shattered by the housing bubble burst.

“This has fundamentally changed the decision matrix on renting versus buying firmly toward renting, and will subdue demand in the single-family market for at least the next several years.”

In the retail real estate segment, stabilization of consumer spending bodes well for recovery, though many risk factors have prevented a solid improvement in most metro areas.

“Recent increases in the price of gasoline and food will directly and negatively impact discretionary spending, threatening chain stores and shopping centers,” said Muoio.

“With the growing prevalence of e-commerce and online retailers, we could be left with a glut of vacant retail space as in-store demand shrinks.”

The report provides analysis of economic indicators and real estate fundamentals in 52 of the largest U.S. metro areas and focuses on the apartment, office/commercial, retail, industrial and single-family segments.

Key findings from the report include:

  • The apartment market will continue to improve over the next four years as renting remains more attractive than homeownership and there is little in the pipeline in terms of new construction.
  • The office/commercial market recovery has begun as supply and demand have crossed over. Office absorption has been positive for the past two quarters, driven by gains in office employment. However, further labor market weakness could inhibit recovery in the office segment in the short-term. According to Muoio, the market has bottomed and will see vacancies decline more rapidly in 2013 and 2014.
  • Retail real estate stands to benefit from consumer spending stabilization, though higher gasoline prices this summer will inhibit this trend.  Additionally, the rise of online retailing will apply downward pressure on in-store demand, further threatening the retail segment.
  • The industrial segment is bottoming but demand appears to be picking up as industrial output continues to rise and exports are at all-time highs.
  • The single-family housing market is weak amidst low sales activity and declining prices. Nearly half the gains in homeownership since 1998 have been erased as a result of the housing crisis and we expect this decline to continue as the psychology of housing has turned to favor rentals. On average, the single-family score fell to 3.80 from 3.71 in the last quarter, as seven markets were downgraded against only two upgrades. (credit, a, finklestein)
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