Apartment development increases, leads recovery

Apartment development increased during the second quarter.

The multifamily situation continued to improve for property management companies during the second quarter, as apartment development appears to have completed its recovery cycle and is now expanding, according to a report from CoStar.

Apartments were rated to have the most significant recovery of any property type, as the nation's vacancy rate continued its fall. Since the start of 2010, the market experienced a vacancy decline of 190 basis points, according to the firm's Mid-Year 2012 Multifamily Review and Outlook. Already, 30 of the 54 largest markets in the country have experienced rent recovery. Overall, the apartment market has experienced nine consecutive quarters of occupancy improvements.

"Apartments continue to have very solid fundamentals," said Erica Champion, senior real estate economist for CoStar. "There's no lack of demand, and we're starting to see supply coming online. Investors have to be very cognizant of the markets and submarkets they play in, but it's a very strong story."

Multiple metropolitan statistical areas in the Southeast such as Washington, D.C., Baltimore and Raleigh-Durham have had a large amount of new apartment supply, which has increased vacancies in this region, the report explained. In Washington, D.C. specifically, demand will likely slow with the large amount of developments.

However, many other MSAs have a significant amount of demand for the properties being constructed, the report said. Areas such as Houston, New York, Seattle and Chicago have increased development activity. In addition, San Francisco, Denver, Chicago and Oklahoma City all had rent growth of nearly 7 percent during the second quarter.

There were approximately 36,000 units added in the MSAs in 2011, but this should increase to close to 75,000, the firm said. Next year, total completed development should surpass 100,000 units. However, the continued growth shouldn't have a significantly negative effect on the apartment market.

"We don't believe it is because we're in the middle of the Echo Boom, which is entering the prime renting cohort, and we expect around 7 million new households to be formed over the next four years – the strongest young household growth since the Baby Boom years – producing the biggest demand boost in 40 years," Champion said.

She added that the housing market shouldn't hurt the apartment situation when looking toward the future, as Echo Boomers will continue to saturate the market in the coming years.

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