Employers are taking notice and are making the move to house their businesses in urban centers. Business-oriented organizations such as Fortune Magazine and Urban Land Institute have underscored the trend of corporations competing for young, highlyeducated, professionals and providing urban, creativity-fostering workplaces to attract them. To remain economically competitive, cities will need to find ways to attract this new batch of young professionals and consequently, their future employers.

Downtown Denver is currently well situated to reap the economic benefits of the millennial generation with its variety of amenities, multi-modal transportation infrastructure, educated population, walkable urban neighborhoods, innovative business climate and emerging green economy. This report showcases Downtown Denver’s strengths, as well as its opportunities for improvement, and hopes to encourage dialog among planners, policy-makers, business leaders and community members that are interested in keeping both the City and County of Denver and Downtown Denver economically competitive locations that continue to appeal to the nation’s future workforce.

Get full report: Denver Magnet Report 2/15/12

10-unit townhome project sells for $3.5M

Mountain Capital Group Inc., based in Marina Del Rey, Calif., bought a 10-unit townhome project, 901 Washington St., Denver, for $3.5 million in late December, 2011.

MCG President, Bob Alexander , said the property was developed by Quality Hill Townhomes
LLC as “for sale” townhomes.

“They were completed in 2009 and went to market,” Alexander said via email. “None were sold. The developer operated the units as rentals, and Mile High Banks had a $4.5 million construction loan.”

MCG got the asset through a short-sale process, financing it with Susan Tucker of Vectra
Bank at 75 percent of purchase price.

“Mountain Capital Group is in exactly the right city to grow our business,” Alexander said of Denver. “Denver ranked 10th for the best cities to relocate to by a Harris Poll and Forbes ranked Colorado the fifth-best state for business and careers.”

Apartment REITs Developing While the Market is Hot; Still Buying Harder-to-Find Deals; Selling Assets to Finance New Deals

Overlooking the fact that the 20- to 34-year-old renters driving the robust apartment market are probably too young to remember the Beach Boys, apartment REIT Camden Property Trust played the surfer anthem on its pre-earnings conference call music to set the theme for the ongoing apartment industry rebound.

“Our pre-conference music was chosen today to commemorate the 50th anniversary of the Beach Boys,” explained Richard J. Campo, chairman and CEO of Camden. “I know we’ve received a number of emails about the Beach Boys being maybe a little too old for this crowd on the call, but for some of us, the ‘Good Vibrations’ is definitely a continuing theme in the multifamily business. We are looking forward to catching the wave of continued strong operating performance in 2012.”

Major publicly traded owners and operators of apartments reported that market conditions continued to improve across all areas in 2011, with occupancy, sales volume, equity and debt financing all showing continued signs of improvement.

“Investors continue to view apartments as a preferred asset class in today’s environment and long-term demographic changes favor rental housing,” said Mark Obrinsky, chief economist of the National Multi Housing Council in Washington, DC. “In the face of an unprecedented virtual shutdown of development, the apartment market continues its strong recovery as developers play catch-up to the growing demand for rental housing.”

Apartment REIT executives addressed the development topic as well as what they see in the acquisition and disposition pipeline and which markets in the country offer the most and least opportunities.

Basement Lurkers Driving Apartment Development
“The recession forced many young folks to double up with roommates, or worse, move back in with their parents. Of course, this is starting to change, which is good for prospective apartment demand,” said Suzanne Mulvee, senior real estate strategist for CoStar Group. “Since 2004, when the homeownership rate peaked, the number of 20- to 34-year-olds has swelled by 2.8 million. In a normal economic climate, this would be fantastic news for landlords. However, the recession drove unemployment among younger workers over 12%, more than double housing boom lows, and killed new household formation.”

That is now changing “as employment for members of this cohort rose faster than employment for middle-aged workers. Over the last year, 62% of all jobs added were awarded to this younger cohort,” Mulvee said. That has helped spark new demand and the apartment industry is now benefitting.

Editor’s Note: CoStar subscribers can enjoy more indepth analysis of the multifamily market by participating in the State of the U.S. Multifamily Market Review and Forecast webinar on Thursday, February 16 at 12:00 Noon EST.

The combination of strong absorption and reduced deliveries worked in the apartment industry’s favor in 2011 and helped fuel solid earnings growth in spite of the weak economy.

UDR Inc. has 18 development and redevelopment projects currently underway that, when completed, will deliver 6,163 units. The company said its development and redevelopment pipelines will require approximately $400 million and $100 million of spending respectively in 2012.

Thomas W. Toomey, president and CEO of UDR, made note of the factors supporting the firm’s 2012 outlook. “First, multifamily supply remains in check. Second, there remains an aversion to home ownership as evidenced by still downward-trending home ownership rates. This phenomenon continues to stimulate demand by depressing turnover and thereby limiting fresh new supply. Lastly, job growth is expected to continue to gain traction in 2012. More importantly, is that the 20- to 34-year-old-age cohort, who has a high propensity rent, should continue to garner a majority of the jobs,” said Toomey.

But there has been some concern that the number of new projects now in the pipeline could outstrip the potential demand along the way.

“Based upon the current level of starts, which has averaged an annual pace of under 170,000 for the last three months, new completions shouldn’t pose a threat in most markets for at least a couple of years,” Timothy J. Naughton, CEO and president of AvalonBay Communities Inc. “In our markets, [Washington] DC will be the exception in 2012 as new deliveries are expected to pick up in the second half of the year.”

D. Keith Oden, president and trust manager of Camden, said one of the things it looks at to determine whether their development pipeline is too big is the ratio of the jobs being created to what the completions are or deliveries are likely to be.

“If you look in our portfolio for 2012 and you take the jobs number divided by the completions number, so anything above 5-to-1 ratio means that things are getting tighter and better around margin, anything less than 5-to-1 would indicate that there things are – that supply is getting edge,” Oden explained. “Out of the 17 markets that we operate in, there is not a single market that currency has less than a 5 to 1 ratio. If you take the aggregate ratio for all Camden’s markets, the ratio right now is 10 to 1. So, we’re projecting across Camden’s markets about 440,000 college jobs and about 44,000 completions. That’s an extraordinary number and (as we like to say) we’ve been tracking this for 20 years and I’ve never seen a scenario like that.”

Property Acquisitions More Challenging, But Still Work in this Market
As part of their ‘capital recycling’ efforts, apartment REITs continue to be active in the marketplace as buyers, too, but are finding deals a bit more challenging as some landlords pull their properties from the market as fundamentals have improved.

Equity Residential has had challenges of its own in unsuccessfully trying to acquire a huge stake in Archstone Properties, losing out to rival Lehman Bros. Aside from that, though, other challenges have arisen David J. Neithercut, president and CEO of Equity Residential said.

“I’d say [acquisition opportunities] are becoming more challenging,” Neithercut said. “It wasn’t long ago when institutional money was no longer pursuing value-add (properties), but we’re seeing a lot of demand for value-added transactions.

“We begin 2012 looking at the transaction market as very similar to last year, and that means an awful lot of capital chasing relatively little supply in our core markets, as well as continued demand for assets in non-core markets with a cap rate spread between the two that remains as wide as we’ve seen for quite some time,” he said.

“Now, brokers are telling us that they’re being asked by owners to value more core assets, which lead these brokers to believe that more product might be coming to market, but I’ll tell you we haven’t seen it yet,” Neithercut added.

During 2011, we also acquired six land parcels, and entered into a one long-term ground lease, all for future development totaling $725 million of new product. Four of these properties or these parcels were acquired in the fourth quarter.

Campo of Camden Property Trust said, “We continue to be active in the transactions market and will be active this year. From what we hear from the broker community, there are a fair number of broker opinions of value that are coming out and there are a fair number of owners that are being pushed by their banks and other lenders where we have debt maturing this year, so we think it’s going to be a pretty good acquisition environment.”

UDR grabbed the headlines last year when it acquired more than $1 billion in New York City. And it started out 2012 forming a new real estate joint venture with MetLife, in a $1.3 billion portfolio of 12 multifamily communities totaling 2,528 apartment units across the country.

“I think when we looked at the beginning of 2011 and we’re formulating that game plan about what to do, we thought it was a great window of opportunity to buy that most people were not in the market trying to buy the caliber of assets we were, and that we think we’ve been rewarded by finding unique opportunities in that window,” said UDR’s Toomey.

“On the acquisition, we’re continuing to look at the marketplace. It’s hard for us to forecast and really see a significant number of opportunities at this point,” Toomey said. “As we start out in ’12, well, our attention has turned more to what do we think the pricing of assets are for the sales side of the equation, and we’re going to move more towards that initially at the year, and I think we’ll have success on the sales front,”

Capital Raising Through Selling UDR’s new capital needs for its developments and MetLife JV will be met through disposition of non-core communities in 2012, the company said.

“In 2012, we are marketing some of our non-core communities and expect to sell to $400 million to $600 million of these communities at an average cap rate between 6% and 6.5%,” said David L. Messenger, UDR’s senior vice president and CFO. “These dispositions are expected to be dilutive by nature given the timing differences between the realization of sales proceeds and the reinvestment in the development and redevelopment activity in 2012.

Overall, the company estimates its non-core assets between $1.2 billion and $1.5 billion.

“If you look at where I and we as the management team size it, that’s equivalent to about where we are in the development pipeline,” Toomey said. “And so our strategy over time is to sell assets and redevelopment, the new development and the development pipeline of (one two) is over the next three years, that’s kind of our horizon to dispose of that.”

AvalonBay Communities also is continuing to shape and reposition its portfolio. Last quarter, it sold five assets, three that were wholly owned and two that were owned by an investment management fund.

“Given the growing permitting activity and the uncertain impact of potential fiscal reform on the [Washington] DC area over the next two to three years, we thought it was a good time to harvest value,” said Timothy J. Naughton, CEO and president of AvalonBay. “Despite our recent actions, DC remains an important target market for us, and over the long-term, we expect to increase our exposure in this market.”

Equity Residential also continued to sell non-core assets, and reduce its overall exposure to non-core markets. It sold 47 assets during the year for a little less than $1.5 billion at a weighted average cap rate of 6.5%

“We were seeing what we thought were very reasonable prices per door, prices per square foot on that product, and we went ahead and hit that bid,” Neithercut of Equity Residential said. “I think that we’ll continue to sell those assets or those non-core assets, non-core markets, today, provided we find opportunities to reinvest that capital.”

Finding non-core assets starts with the returns that are substandard because rents aren’t growing fast enough or capex is too high, said Camden’s Campo.

“Within that then we look at things like the direction of the submarket, asset quality, is it gotten to a point where we can’t operate it to a Camden standard anymore and that’s how we fine tune the list of the bottom quarter of performers,” Campo said. “And so for 2012, we’re ramping up dispose this year in the $250 million range. So depending on the average asset size, you’re talking about six to eight Camden communities out of 200.”

Hard To Find a Market That REITs Don’t Want To Be In ”Our 2012 guidance contemplates 7.4% market rent growth which is consistent with a 5-year outlook,” said Michael J. Schall, president and CEO of Essex Property Trust. “The following factors were important in arriving at our market rent estimates.”

“First we’ve seen a slow but steady improvement in the states of California and Washington economies since 2010 and we do not see this progress abating,” Schall said. “Clearly we expect the coastal areas of California and Washington to outperform as the inland areas have greater unemployment overhang from foreclosures and related issues.”

Slow but steady improvement is the story across much of the rest of the country.

“I’d put Northern California in 7% to 8% range,” said Leo S. Horey, executive vice president of operations for AvalonBay.

However, “on the other end of the spectrum while still healthy and positive, I’d put [Washington] DC around 4% and then the remainder of our regions are around our average call it, 5.5% to 6%,” Horey said.

Camden Property Trust’s Oden graded other markets across the country. As “A” markets he listed: Austin, Dallas and Charlotte. He gave an “A-” to Houston and Raleigh. Denver and South Florida received a “B+.” Orlando, Washington DC, Atlanta and Tampa were in “B” category. Southern California and Phoenix were both rated “B-” but improving. Coming in last this year was Las Vegas, which Oden rated a “C-.”

In comparing 2012 outlook to last year, Oden said all of its markets have a better rating this year except Washington DC, which it lowered from “A” to “B.”

“Overall, our portfolio this year would rank as a “B+” compared to an overall ranking of “B” in 2011 and every markets is rated either stable or improving,” Oden said.

Article courtesy of CoStar Group (http://costar.com).

In addition to positive net absorption, an improving job market and favorable demographics have supported a sharp rise in apartment rents. Reis reported that effective rents increased by 2.3 percent in 2010, and we expect rent growth to accelerate through 2013 as demand remains strong and construction remains below its historical long-term average.

As a result of the quick recovery of apartment fundamentals, interest in purchasing core assets has driven up the pricing of class-A apartments in primary markets to near pre-crisis levels in both cap rates and price per unit. As of the second quarter of 2011, the average transaction cap rate, including all asset classes, declined by about 20 basis points to 6.6 percent, while average cap rates for class-A apartments in primary markets declined to 4.7 percent, according to Witten Advisors.

The apartment sector’s robust recovery is supported by favorable demographic trends (echo boomers), declining homeownership, a limited supply pipeline, and attractive government- sponsored entity (GSE) financing. Based on these demand drivers, we believe the apartment market will likely experience a continuation of improvement in vacancy and rent growth over the next three to four years.

Household formation dropped to approximately 500,000 per year from 2008 to 2010, well below the long-term average of 1.2 million. Much of this decline was driven by young people doubling-up during the recession. Approximately three million young adults, aged between 20 to 34 years old, were living with their families during the past five years.

As job growth began to materialize for this age cohort in 2010, their pent-up demand for apartments returned to the market in 2010 and 2011. We expect this growing population, an expected 1.9 million additional echo boomers from 2012 to 2014, and their continued job recovery will likely support long-term demand for multifamily housing as the economy recovers.

In addition to released pent-up demand, the shift in preference from homeownership to rental is generating additional demand for apartment units. The homeownership rate has fallen from 69.0 percent in the third quarter of 2006 to 66.1 percent in the third quarter of
2011, which translates to approximately 2.7 million potential new household renters. The
increased rate of foreclosures has also impacted the rate of homeownership and we expect it will continue to do so in the near-term. Roughly 2.8 million homes have been foreclosed since 2008, with another five million expected to enter foreclosure process by the banks by the end of 2012.

Despite home affordability currently reaching an all-time high, many potential buyers are choosing to rent for now because of declining U.S. home values as well as the difficulty in qualifying for a mortgage, which makes it harder to buy homes. We expect housing prices will likely remain weak for the foreseeable future.

While demand for apartments increased over the past year and a half, new supply remained muted. We expect approximately 40,000 new apartment units will be delivered in 2011, approximately 30 percent of the long-term average. Additionally, we expect the five-year supply forecast will remain below the long-term average.

The GSEs—Fannie Mae, Freddie Mac and HUD—continue to provide attractive apartment financing terms and rates: Loan-to-value ratios are currently 70 percent to 75 percent and
190 to 220 basis points over Treasuries. In addition, an increasing number of balance sheet
lenders are being forced to compete to lend aggressively.

With compressed apartment cap rates, improved development financing, and lower construction costs (estimated to have declined 10 percent to 25 percent from the peak), we expect excellent development opportunities in many markets over the next few years.

Given a favorable financing environment and strong demand, development activities could accelerate in 2013 to 2014 as the market strengthens, presenting the risk of limited rent growth or oversupply. However, in most major markets across the U.S., we expect demand to keep pace with new supply even as construction increases because of the trends previously discussed.

Historically, the apartment sector exhibited the highest average total return and the second best risk-adjusted return among the five property sectors. It currently is experiencing a robust recovery supported by favorable demographic trends (echo boomers), declining homeownership, a limited supply pipeline and attractive GSE financing. Due to these short and long-term trends, apartments are currently an attractive asset class for investors and will likely remain so for the next several years.

David Lynn is a managing director, generalist portfolio manager and head of investment strategy for Clarion Partners in New York.

Jan 17, 2012 11:57 AM, By David Lynn, Contributing Columnist,
Money & Real Estate (http://nreionline.com/commentary/money)

With the increasing popularity of multifamily properties as an investment class, some industry pros are beginning to question whether the sector might end up being overbuilt.

So far during this real estate cycle, developers have been extremely conservative in
delivering new product to the market. In 2011, less than 40,000 units came on line, the lowest figure in more than 30 years, according to Reis Inc., a New York City-based research firm. Marcus & Millichap Real Estate Investment Services, an Encino, Calif.-based brokerage firm, estimates that multifamily construction completions last year totaled just 35,000 units.

Yet going forward, construction activity in the sector will undoubtedly expand.

In October, 2011 47 percent of respondents to a quarterly survey administered by the National Multi-Housing Council (NMHC), a Washington, D.C.-based trade group, reported a substantial pick-up in land acquisitions, financing deals and permit applications for multifamily properties in their local markets. In 2012, Reis expects to see between 72,000 and 85,000 newly completed units, while Marcus & Millichap anticipates 85,000 new unit deliveries on a national level.

Given the abundance of demand for new apartments, that still won’t put the sector in danger of overbuilding in 2012. In 2011, the national vacancy rate for multifamily properties declined 120 basis points from the year prior to 5.4 percent, Marcus & Millichap reports. Effective monthly rents rose 4 percent, to $995 per unit. This year, multifamily vacancy should fall another 40 basis points, to 5 percent, in Marcus & Millichap’s estimates. Effective rents will likely rise 4.8 percent.

About 43 percent of respondents to the NMHC survey said that multifamily development is near the right level given existing demand, while 54 percent said that demand continues to significantly outstrip supply, even with the expected ramp-up in new construction.

It is improbable that we will face overdevelopment in 2012 because strong demand should remain in place through the coming year, says John Chang, vice president of research services with Marcus & Millichap. For example, the prime renter cohort, aged between 20 and 34, will continue to grow significantly and enjoy an outsized share of job gains. Although employment is not expected to grow at an exceptional pace, it should outpace 2011 performance in the coming year, generating significant housing demand.

Almost all markets will experience vacancy declines in the coming year as demand outstrips supply additions, he adds.

Jubeen Vaghefi, managing director and national leader of the multifamily practice with Jones Lang LaSalle, a Chicago-based real estate services firm, echoes Chang s sentiments. He anticipates that in core markets, multifamily rents will grow between 5 and 8 percent in 2012. In secondary markets, rents might rise another 3 to 5 percent.

If you look back over the last five years, there hasn’t been much in the way of new supply, and most people are leaning toward renting versus buying, Vaghefi says. Occupancies in most markets are up, so for 2012 we see a continuation of last year.

Beyond the Bend

Things might get trickier, however, once 2013 comes around.

The NMHC reports that 22 percent of its survey respondents said that apartment market conditions in their regions were looser than three months ago, compared to only 3 percent in July. About 51 percent said that conditions remained the same, compared to 30 percent in July, and another 27 percent reported that conditions have tightened, compared to 67 percent in July.

The NMHC Market Tightness Index in October stood at 56, down from 82 in July and a peak of 90 in April. A reading above 50 indicates that market conditions are getting tighter; below 50 shows that market conditions are getting looser.

Even with substantial demand for new apartments, net absorption in the multifamily sector decreased significantly in 2011, to 153,000 units from 225,000 units in 2010, according to Marcus & Millichap. With less than 40,000 new units added to the market last year, lower absorption levels haven’t threatened to become a problem so far.

But as the number of new construction units spikes to between 105,000 and 250,000 in 2013, over-building may become a legitimate concern, according to Victor Calanog, Vice President of research and economics with Reis. In the past 20 years, new multifamily construction peaked at 188,870 units in 1999.

As of October, permits for apartment buildings containing at least five units increased 45 percent year-over-year, to 232,000 units, reports Marcus & Millichap. Given a 12-to-18-month construction window, that means the industry might begin to see an imbalance between supply and demand starting in 2013.

We’ve been bringing up the possibility [of overbuilding] for more than a year now, says Calanog. In terms of timing, we don’t think much of the supply will hit till late 2012 and that doesn’t even account for the usual delays we experience in commercial real estate construction. If there is indeed a deluge of new buildings coming to the market, the sector will probably feel the brunt of any pain it might cause in 2013.

Jan 18, 2012 10:50 AM, By Elaine Misonzhnik, Senior Associate Editor. Full article at:
http://www.nreionline.com/news/no_danger_overbuilding_multifamily_01182012

Hessam Nadji, managing director, research and advisory services at the firm, tells GlobeSt.com that “Demand for rental housing will remain robust in 2012 as strong demographic trends combine with

shifting consumer behavior. The total population within the prime 20-34 year old renter cohort has increased dramatically, and will increase by an additional 2 million through 2015,” he says. “As this age cohort continues to face significant hurdles to homeownership and as the tight employment market encourages flexible housing decisions, many of these new households will continue to favor renting.”

In addition, Nadji says, though foreclosure activity has begun to recede from peak levels, homeownership rates have declined dramatically since reaching their 69.2% peak in 2004. “The most recent readings place homeownership at 66.3%, and this sharp decline has significantly added to rental housing demand. As a result, rental housing will remain a favored choice for the coming year.”

Nadji tells GlobeSt.com that “strong demand trends will continue to pressure rental housing stock, and although many developers have begun to ramp-up construction plans, substantive increases in construction remains one to two years out.” Presently, only 85,000 new apartments are anticipated for
2012, he says, “a significant shortfall from the forecast demand of 120,000 apartments in 2012. This will press vacancies to the 5% range by year-end, the lowest level since 2001, and empower owners to advance effective rents by 4.8%.”

Foreclosure activity has begun to decelerate from peak levels, but will remain elevated through the coming year, adds Nadji. “Many of the foreclosures delayed by the investigation into ‘robo-signing’ that surfaced in 2010 will continue to move forward while areas that have demonstrated very slow employment growth will continue to face significant risk.”

He points out that Southern California, Florida, Georgia and Michigan will face the steepest hurdles while Arizona and Nevada, where foreclosures were most prevalent over the last couple of years, have improved prospects in the coming year “as job growth is forecast to significantly outpace the national average in these areas.”

The San Francisco Bay Area has earned two top spots in this year’s NAI, which ranks 44 major apartment markets based upon a series of 12-month, forward-looking economic and supply and demand variables including forecast employment growth, vacancy, construction, housing affordability and rents. The Bay Area dislodged its East Coast counterparts, with San Jose (#1) and San Francisco (#2) occupying the top positions in this year’s index, edging out New York (#3) and Washington, DC (#9). The Silicon Valley

Benefitted from robust technology employment and significant income gains, as well as 40 percent of all venture capital funding in 2011. Rounding out the bottom of the NAI are Jacksonville (#44), Tucson (#43) and Sacramento (#42).

Barring any unforeseen shocks to the global financial markets, an array of lenders will continue to finance multifamily developments and acquisitions in 2012 against a backdrop of historically low interest rates, says William E. Hughes, senior vice president and managing director of Marcus & Millichap Capital Corp. “Fundamentals and a favorable spread against Treasury’s will promote multifamily development
this year. Fannie Mae and Freddie Mac will remain the chief suppliers of apartment loans in an increasingly crowded field of providers.

“In fact, monetary policy—both domestically and worldwide—should keep interest rates low for several years to come,” adds Hughes. “Expect life companies and commercial banks to grow market share by pursuing assets with good credit features and stabilized revenue.”

After a brief respite in the third quarter of 2011, multifamily investment sales activity is expected to rebound this year. “Sellers will bring more properties to market, capitalizing on strong investor demand, based on the strong economic gains recorded at the end of 2011,” says John Sebree, national director of Marcus & Millichap’s National Multi Housing Group. “We expect capital to migrate to secondary markets and value-added investments. Sales volume will rise as risk tolerance expands and capital becomes more fluid. Expect higher levels of workout activity from banks and lenders,” Sebree notes.

For more thought leadership from Marcus & Millichap Real Estate Investment Services, check out “StreetSmart,” a blog by Hessam Nadji, the firm’s managing director of research and advisory services. The blog provides Thought Leadership positions on a variety of commercial real estate-related issues. Click here to watch Nadji on CNBC’s “Realty Check” program talking about multifamily and the housing crash. For more information on the Thought Leadership program, contact Scott Thompson at sthompson@alm.com.
Categories: West, Multifamily, Marcus & Millichap, Los Angeles

Natalie Dolce
Natalie Dolce, editor of the West Coast region for GlobeSt.com and Real Estate Forum, is responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, Natalie was Northeast bureau chief, covering New York City for GlobeSt.com. Dolce’s background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats Arthur Frommer’s Budget Travel magazine, FashionLedge.com, Co-Ed magazine, and has also freelanced for a number of publications including

MSNBC.com and Museums New York magazine. Contact Natalie Dolce.

Review 2011

Employment growth returned to the Denver Metro Area in 2011, with a net gain of nearly 7,200 jobs, equating to a 0.6% increase. Having not fallen as deep into recession as many other metro markets, Denver performed well on many fronts, especially within the housing sector.

At last report in November, single-family, sales were up 15.1% from a year ago, while the median price for all homes was off slightly, dropping 1.2% to $210,000. Unsold inventory shrunk by 37% from a year ago to the lowest level in a decade, and was below a five-month supply amidst scattered reports citing a lack of quality for-sale housing available to buyers. A tightening of supply was also evident in the apartment sector, with a high level of demand pushing occupancy to its highest level in a decade.

• Net apartment absorption in 2011 added to 2010′s hefty gains, with 2,548 units absorbed. With this performance, demand outpaced new deliveries by 68% over the past two years.
• New apartment completions totaled 1,302 units for the year, the lowest annual total since 2007, and well below the past decade average of 3,384 units each year. The most significant addition to inventory for the year was a 510-unit community that began lease-up in Aurora.
• The volume of multifamily permits accelerated in 2011, with permits for 2,180 apartment, townhome, and condo units issued, up from permits for 1,148 units in 2010. Even with increased developer interest, the permit count for multifamily structures in 2011 was down about 50% from the past decade’s annual average of 4,497 units.
• Reaching its lowest level in 11 years, the overall average apartment vacancy rate declined to 4.8% at the close of 2011, but still remained well shy of challenging the 2000 low of 3.0%.
• The average market rent noted a 3.0% gain for the year, rising to a new high of $948. Even at this level, monthly rental payments remained below monthly homeownership costs by about 20%.

THOUGHT LEADER

ENCINO, CA- On a recent apartment webcast, 57% of participants predict that renter demand will get stronger in 2012, while 2% says it will be weaker, with 40% saying it will stay the same. The 2012 Apartment Market Outlook Video Webcast was put on by Marcus & Millichap Real Estate Investment Services, and was generally optimistic in the sector’s “continuation of modest growth in 2012.”

According to William Hughes, managing director of Marcus & Millichap Capital Corp., from a lenders standpoint, the improving apartment fundamentals have supported their level of confidence in the marketplace. “It has been easy to finance core assets all the way down to C assets across the board,” he said. “It becomes a little choppy as you move into tertiary and smaller assets, but even those are being financed by local and regional banks.”

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Capital supply, he said, will remain healthy, but not for every asset. Agency lenders will continue to be Fannie Mae and Freddie Mac, life companies, regional and local banks, debt funds, and CMBS, he says.

Hughes pointed out that debt and equity markets for the first half of the year will resemble the last half of 2011—pointing to the choppy domestic economy such as slowly improving employment numbers; inconsistent economic indices; and the election; as well as global influences like foreign sovereign debt and economic geopolitical uncertainty.

Hughes says that investor strategies will be: maturing overleveraged properties—extensions and recapitalizations; and refinancing. “It is a great time to take down fixed-rate financing,” he said.

When Hessam Nadji, managing director of research and advisory services at Marcus & Millichap, asked webcast participants if job growth does not improve over the next 12 months, will apartment demand contract, stay the same or get stronger, 64% said it would stay the same, 22% said it will continue to get stronger and 16% predicted that it would contract. According to Nadji, as also mentioned in another GlobeSt.com article, companies aren’t expanding or hiring aggressively, which is something he expects to see through 2012, “but companies aren’t panicking.”

Nadji pointed out that “The job creation trend is still below expectations, and the muted housing market will have a tremendous affect on consumer sentiment. Companies need to enter an expansion mode for us to see improvement, and that won’t happen until 2013.”

Another interesting participant question was whether or not interest rates in 2012 would be somewhat higher, be much higher or be about the same. Approximately 40% of participants said somewhat higher, with 58% saying “about the same,” while only 1% predicted “much higher.”

On the construction side of this cycle, Nadji said that developers are working to bring new product to the marketplace that will be delivered in 2013 and 2014. “At a macro level, we don’t see overbuilding,” he said.

Overall, the webcast echoed key points from a previously reported midyear webcast from the company. In that webcast, Nadji pointed out that lowest apartment vacancy markets include: New York; Minneapolis; San Jose, CA; Portland, OR; San Diego; San Francisco; Milwaukee; and Philadelphia. Higher vacancy markets mentioned include: Jacksonville, FL; Houston; Tucson; Atlanta; Phoenix, Las Vegas, and Columbus, OH.

Michael Desiato, vice president and group publisher of ALM/Real Estate Media Group, began the day-long event by pointing out that the apartment industry is truly outperforming the rest of every commercial property sector. “If we actually had an economy that was working right now, we would really be in good shape,” Desiato said.

Debt And Equity Were Hot Topics
Desiato’s comments set the tone for panels throughout the day, where nearly all speakers agreed that the multifamily market in the near-term and long-term is expected to perform well. The RealShare Conference Series is produced by ALM’s Real Estate Media Group, which also publishes Real Estate Forum and GlobeSt.com.
“We are extremely busy and continue to work very hard on deals throughout the marketplace,” said Klein. “We are on track to meet our yearly production goals. Fannie  is providing $1 out of every $5 in the multifamily market today.”

Klein joined moderator Lew Feldman, partner of Goodwin Procter LLP, and Paul Angle, western managing regional director of Freddie Mac in the event’s first panel. Angle too, discussed how busy Freddie Mac has been lately. “We are active in refinances and acquisitions and despite the fact that we are at record pace, we still have great capacity.”

There is a tremendous cap rate compression in the coastal markets, said Klein. “We are seeing good opportunities in places like Minneapolis and North County San Diego for example. What we see on the coastal markets is extremely strong.”

Angle pointed  out that he enjoys any market where there is job growth and rising rents. The markets where he sees that in include Denver, Seattle, and the Silicon Valley, which has taken off tremendously in recent months, he said. In the long term, he points to places like Orange County, L.A. and San Diego. “We are also making loans in Phoenix and Las Vegas selectively in stable neighborhoods,” he said.

Klein noted that underwriting standards haven’t changed over the past year at all. “We are extremely focused on property condition and the ongoing maintenance of those properties through the loan term. We are not looking to underwrite on a future repositioning, but instead, on current values,” he said. “Our LTV’s go as high as 80%, but obviously that changes depending on the product type.”

Angle added that Freddie Mac has “always had a high underwriting standard.” He noted that “we have been more aggressive in places where we see market condition growth in the future,” adding that “We really adapt to the conditions in the market.”
In terms of the characteristics they are looking for in a borrower, Angle says Freddie Mac looks closely at the borrower’s track record and investigates each situation (foreclosure for example) to see how the borrower has behaved. Klein also looks at how a borrower has performed and managed through each situation. “We don’t like borrowers that don’t pay us back or pay others back,” Klein said.

When asked whether they were concerned in the long run with the low interest rates of today, Klein said that “Our lenders run a complex variety of exit scenarios,” adding that “Certainly given the huge maturing portfolio that we face in 2012 in particular, it’s a great concern.” Angle pointed out that it is more of a concern on the five-year loans versus the 10-year loans.

Next up was a panel titled: “Outside Influences: Where Things are Going,” moderated by Tom Bannon, CEO of California Apartment Association. Richard Hollowell, managing director of the Reznick Group, pointed out that single-family residential is troubled and is fueling multifamily. This year, Hollowell said, banks alone will foreclose 800,000 single-family homes. “Each one of those folks gets dumped in the
rental community,” he said.

Paul Habibi of UCLA also agreed that there is a huge demand for rental housing. “We have very little job formation,” he said. “In most gateway cities, the cost to rent is still significantly less than the cost to own.” “If you look at the Gen Y coming through this cycle, there is a reason to be pretty bullish on multifamily,” said Jeffrey Meyers, principal of Meyers LLC. “I think you can really get behind multifamily and it will have a strong run. Capital is now more focused on multifamily versus
residential.”

Meyers continued to point out that there were lots of funds created that were focused on distressed and single-family properties, but he has seen a decline lately in that focus. “The returns an investor needs on single-family are higher than in the multifamily arena.” Sharon Dworkin Bell, senior staff vice president of National Association of Home Builders, said that it is also a great time to be building apartments. “The last quarter, we saw a bit of a plateau, but we expect it to rise. We see a lot of progress and increase in production, but we have a long way to go in terms of meeting the market equilibrium.”

When asked how useful low income housing tax credits are in this economy, Hollowell said that with construction costs lower than they have been in a long time, “people should be sharpening their pencils and see how this vehicle will work.” But she added that “it is not for the faint of heart.”

Underwater multifamily projects are still a problem, Bell said. “There is damage out there, but lenders are probably being more cooperative with borrowers these days given the interest rates. The lenders are moving out the thresholds on some of these loans.”

Written by Natalie Dolce, editor of the West Coast region for GlobeSt.com and Real Estate Forum, is responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, Natalie was Northeast bureau chief, covering New York City for GlobeSt.com. Dolce’s background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats Arthur Frommer’s Budget Travel magazine, FashionLedge.com, Co-Ed magazine, and has also freelanced for a number of publications including MSNBC.com and Museums New York magazine.

Russ Appel, president of the Praedium Group LLC, cited the strong demand and the stable fundamentals of the apartment market, calling it “probably the only real estate sector where you see this stability.” Appel joined other speakers including moderator Marc Renard, executive managing director of Cushman & Wakefield, on a panel titled: “Switching to High Gear: Multifamily Investment Heats Up.” The RealShare Conference Series is produced by ALM’s Real Estate Media Group, which also publishes Real Estate Forum and GlobeSt.com.

As an asset class, real estate is most appealing and is attracting capital now more than it has historically from overseas, including China, Asia and Korea for example, said Mark Higgins, president of Cornerstone Real Estate Advisers LLC. “The money is flowing over real estate in particular, and apartments are the rock star,” he said. “The moons are perfectly aligned for apartments right now.”

As GlobeSt.com previously reported, Higgins’ point was echoed throughout the day by other panelists, who said that apartments were the “place of stability.” Robert Hart, president and CEO of KW Multifamily Management Group Kennedy Wilson, pointed to the abundance of capital and cash on hand to do deals. “There are a lot of people seeking quality B assets; there are sellers out there; Fannie and Freddie are super-active; on the bridge side, there are banks that are very aggressive; and there are a lot of people looking to do debt and equity sponsorships,” he said.

Appel noted that interest rates have been “the lifeline to our recovery,” adding that, with economic growth uncertain over the next two to four years, “If you can use leverage responsibly and generate cash-on-cash returns, you can bet less on growth.”
Hart said that value-add plays are coming back, but he added, “We need to get people working to justify the higher rents.” According to Appel, now is the best time in the past 15 years or so to be a value-add investor. “You have demand for units picking up. Now is the time you can start investing in these properties and getting a real return on your assets.”

Alan George, chief investment officer of Equity Residential, cited the wave of debt maturities coming up over the next five years, saying that Equity stands ready to take advantage of opportunities when they arise but is skeptical of a land rush. “We certainly hope there will be some opportunity, and had hoped there would be more this year than there have been,” he said.

During a breakout panel titled: “Distress: Turning Misfortune to Fortune,” receiver Taylor Grant, founding principal of Real Estate Receiverships, told the 1,400 conference-goers that a looming problem is whether the flight of capital to the multifamily sector has already overheated the market. “Current cap rates of 4% to 5% readily indicate the intense interest in the multifamily category,” Grant said.
However, he added, some of the actors in the multifamily industry today—particularly those involved in the purchase of existing distressed properties—are unfamiliar with risks, such as deferred capital maintenance and lurking legal issues.

Another factor that will affect the multifamily sector is the emerging shadow market, noted Grant, a former developer. “In the current economic scenario, Grant explained, “no one knows how deep the multifamily market really is.” Many investors, and even Fannie Mae and FHA, Grant explained, are exploring the possibility of renting unoccupied, foreclosed homes. “And just how many children of baby boomers are moving back with their parents due to the unemployment situation? ‘Who knows,’ ” he said.

Notwithstanding the shadow housing situation, Grant believes the multifamily market is going to thrive in the next decade due to a number of demographic and economic considerations. First, there is every reason to believe that the live/work segment will accelerate among the Generation X and Y cohorts, with singles teaming up to share expenses, he says. Moreover, last year, the Census Bureau reported that about 50 % of those who answered a national survey said they were running their businesses out of their home, he added. Secondly, he said, a survey conducted by the National Foundation for Credit Counseling has found that 42 % of those who once purchased a home don’t own one now and believe that they will never own one again.

Written by Natalie Dolce, editor of the West Coast region for GlobeSt.com and Real Estate Forum, is responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, Natalie was Northeast bureau chief, covering New York City for GlobeSt.com. Dolce’s background includes a stint at InStyle Magazine, and as managing editor with New York
Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats Arthur Frommer’s Budget Travel magazine, FashionLedge.com, Co-Ed magazine, and has also freelanced for a number of publications including MSNBC.com and Museums New York magazine.