The Midwest lags behind the coasts for a number of reasons. “The fundamentals of job creation, property appreciation, rental demand, and the existence of affordable single-family homes continue to keep multifamily prices flat in the Midwest,” McDermott says.
Other locations where competition may not be quite as fierce are those metropolitan areas with few barriers to entry and lots of economic ups and downs. Any multifamily property owner knows these markets–Austin, Houston, Atlanta, Denver, and Phoenix, to name just a few.
In good times, these cities boast high employment, which fills apartments and allows owners to charge premium rents. In bad times, though, economic downturns hit these markets hard, throwing a glut of vacant apartments on the market. “There are markets that at certain times we won’t touch,” Neely says. “But there will be times when it’s appropriate to buy product in almost any market. It’s just a matter of timing.”
The poster child for this may be Houston. While overproduction forced concessionary markets such as Atlanta and Phoenix to limit apartment development to fewer than 4,000 units yearly during the last few years, Houston has kept chugging along to the pace of 12,000 new units a year. Such serious oversupply makes properties in the area much less attractive to buyers. “In Houston, the development overhang is so strong,” Thompson says. “It is the market with the most fundamental challenges. It will probably lag 12 to 18 months before it gets traction.”
But things also can change quickly in a market like this. “The minute demand picks up and they get a handle on construction, that market can flip over,” Thompson says.
Buyers in Atlanta are hoping for much the same thing. For three straight years, Marcus & Millichap rated the Southern city as its worst multifamily market. But activity is finally on the upswing. “People are taking a position in Atlanta,” Thompson says. “We’ve had one buyer make three deals here. He recognizes that Atlanta has been through the carnage, and now is the time to take a position. It has a proven ability to add 80,000 or 90,000 jobs.”
Denver is also welcoming buyers back. “Denver was the poster child for what was wrong in multifamily,” ARA’s Hawks says. “Nobody is building, so there’s no new competition. They are still graduating 55,000 kids a year from high school, getting some jobs, and vacancies have dropped from 25 percent over the past year. It looks like it’s moving up.”
