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Market Conditions Commercial - Apartment
Apartments - Hot Top 10 Markets in 2005:
According to Marcus and Millichap and National Real Estate Investor magazine the west coast has dominated the hottest top ten apartment markets in the U.S. topping the list is California the Riverside-San Bernardino market, moving up three spots from its 2004 ranking, followed by San Diego county, and Orange County California, which dropped from the number one ranked spot. Las vegas and Los Angeles were also in the top ten. Finishing off the 6th, 7th, 8th, and 9th apartment market rankings were Washington, D.C.; Boston; Fort Lauderdale, Fla.; and New York City. Emerging rental growth markets included Washington D.C. and New York as the gap between renting and buying widens and demographics continue to strengthen. The above apartment rankings were based upon weighted-averages of forecast employment growth, vacancy, construction, housing affordability and rent growth as according to Marcus and Millichap's national index. Real estate appraisers have had a hard time keeping up with the 2005 apartment market.
Conversion of apartments to condominiums has reached a fever pitch in major metropolitan market areas including Southern California, New York/New Jersey and Florida. The Miami apartment market has been hot but its ranking has slipped 10 places. New condominium construction and increasing supply have spurred renters to buy as interest rates remain low and the increasing prices of single family detached product continue to escalate making room for lower priced attached product. For example, Sunvest Communities, LLC, a condominium conversion firm, has purchased a 336-unit apartment complex known as The Grand Venezia at Bay Watch for $49 million and an 86-unit apartment complex known as The Grand Bellagio at Bay Watch for $19.1 million. Both properties were recently constructed in 2002. The amenities include gated entry, pools, health and fitness spas, business center, jogging paths and boat slips.
Capitalization Rate Outlook for 2005
What’s in a capitalization rate? A cap rate consists of the expected rate of inflation, plus the real rate of return (basic rate), plus a risk premium (the 10yr. Treasury bond is considered the risk free rate) minus the NOI growth rate. The spread between real estate cap rates (NCREIF Cap Rate) and the 10-year Treasury has generally varied between 100 and 450 basis points since 1992. The risk premium spread for investment grade properties in 2004-05 have ranged from 3.5% to 4.5%, but are expected to slowly decline in the near future as large amounts of capital compete for a limited supply of investment grade properties. NOI growth rates are expected to increase from 1.0% to 2.0% on average. Poor performance on alternative investments (primarily the stock market) is one of the reasons cited for declining risk premiums as massive amounts capital flow into real estate. Moreover, South American and European investors are also flocking to U.S. real estate because of the low real rates of return in their own countries. In addition, the prospects for a strengthening dollar over the next several years has introduced another element in european investors yield expectations. Some european investors have introduced currency expectations into their spread sheets and have out bid american investors on several investment grade properties.
According to Korpacz Real Estate Investor Survey, national unleveraged cap rates on apartments ranged from 5.0% to 9.25% and averaged 7.01% for the 4th quarter of 2004 and were down slightly from the 3rd quarter. Shopping center cap rates were about the same 5.5% to 9.5% with an average of 7.4%. Office and warehouse cap rates were higher averaging 8.4% and 8.12% respectively. This is to be expected especially in many national office markets were vacancy rates are just now slowly starting to decline. Cap rates for apartments should trend toward 7% and remain constant for the next 2 years, notwithstanding any anomalies in interest rates and assuming rental rates continued to increase.
Questions to be answered on our site next month. Past history has indicated that the general rule was leveraged cap rates were typically higher due to the inherent risk associated with mortgage debt. As LTV's increase the risk of default in faltering markets increases. However, in this economic environment, declining cap rates on leveraged properties have put this rule on its ear. At higher price levels investors have been able to purchase leveraged properties at higher prices and still maintain the same overall yield (IRR) and thus purchase with a lower cap rate. Will this trend continue and will the market stabilize as long term interest rates start to increase sometime in late 2005 or 2006? Will investors again recognize that highly leveraged properties are associated with higher risk over a 10 year holding period and demand higher returns thus pushing cap rates upward?
Is it time for lenders to reconsider their property specific debt coverage ratios if long term interest rates start to trend upward?
Commercial Appraisal, Industrial, & Apartment Market Resource Links
Click here for resource links to Office & Industrial markets
Click here for resource links to latest local market reports on industrial, hotel, office, retail.
Click here for resource links to local Apartment & Office market in key counties throughout Southern & Northern California.
Click here for resource links to national retail, industrial, senior, and hospitality markets
Click here for resource links to industry wide data resources on market conditions for all types of commercial property.
Residential Markets Conditions
Find out trends in real estate housing values throughout Southern California, Orange County, Los Angeles County, Riverside County, San Diego County, San Bernardino County, Ventura County, including current national real estate home value trends - Click on the resource links below.
Click here for resource links to residential resale activity Orange County Real Estate Market Trends Report
Vacant Land
Click here for resource links to research data on vacant land, land in the entitlement process including, raw, semifinished and finished lots throughout Southern California. 
New Home Market-New Tracts
Click here for resource links to latest data on new home subdivision research data throughout California and national markets.
Apartment Data Resources
Click here for links to current data resources on rents, unit mix, floor plans, amenities, etc. on apartments throughout Southern California.
Click here for links to data resources California Economic Trends
Click here for links to Southern California Local Market Conditions
Disclaimer: We are not affiliated in any way with any of the above companies nor do we suggest any sponsorship, approval, or affiliation with any company referred to on this web site. The information posted here is for the purpose of showing general data resources that are available to the public on the web. All information including any commercial appraisal information that is shown on our web site is of a general nature and is not intended to show any relationship with any company. It is not intended to address the circumstances of any particular individual or entity. Even though we strive to provide accurate and timely information, we do not guarantee that such information is accurate. No one should act upon such information without appropriate professional advice after a thorough examination of the facts of their particular situation. We are not attorney's, tax professionals, financial planners or accountants. The above is not intended to give legal advise, advise on tax matters, estate or financial planning, and or accounting matters. Please check with your attorney, tax advisor, financial planner, and accountant for information regarding said matters.
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