Point of View: From Bullish to Balanced: A Changing View of the U.S. Apartment Market

Abstract

Demand for apartments should continue to be strong for several years due to the growing renter base, declining homeownership rates, and pent-up demand as the economy creates jobs.While the start of the apartment development cycle has been very well publicized and bears watching in select markets, there will be enough demand to fill new units that are in the pipeline under a normal economic scenario.Affordability is a risk to the apartment sector. High occupancies have enabled landlords to raise rents aggressively, making renting expensive relative to owning a home. Also, rents are rising faster than the growth in personal income, a situation that cannot be maintained long term.Apartments have outperformed other property types in recent years. Favorable capital markets conditions, the availability of cheap debt from government agencies, and robust investor demand for stable assets with solid income yields have driven up property values.The relative outperformance is not likely to continue more than another year or two. For a core investment platform, apartment sector allocations have shifted from a strong overweight to closer to par with the NCREIF Property Index.Core and value-add investors should focus on development opportunities in prime locations in which growth is high and/or supply is naturally limited due to space or zoning regulations. Prime locations are much more likely to retain demand in any economic environment.