Leveling Out
Multifamily completions maintain an even keel at the end of ’06.
The strong recovery that characterized the apartment market over the past few years is expected to give way to more stable growth in 2007, according to Marcus & Millichap’s quarterly “Performance Monitor,” which analyzes multifamily completions, revenue, permits, and starts and indexes them back to the year 2000.
At the end of the fourth quarter 2006, revenue growth remained robust, although owners will feel some competition as reconversions draw from renter demand. As such, revenue growth will be driven by effective rent growth rather than occupancy improvements.
The number of units completed increased in the fourth quarter compared to the previous quarter, adding more than 20,000 units to inventory. Completions, as a percent of inventory, are running at 0.3 percent, which is 54 percent of 2000 levels.
Compared to the same period one year ago, vacancy remains nearly flat. As conversion activity reached the lowest levels in 15 quarters, supply surpassed demand, causing a slight fourth quarter bump in vacancy. Condo conversion activity continues to wane, with an estimated 3,700 units sold for conversion during the fourth quarter of 2006, down almost 90 percent from the same per iod in 2005. – Marcus & Millichap
Money Matters
Analysts pull back on some multifamily stocks.
Analysts up and down Wall Street adjusted their recommendations in the first quarter as they reflected on 2006 performance and prognosticated on how current economic trends will affect the apartment industry. Job and apartment fundamentals are moderating in several rental markets, and home-buying is still affordable enough for some renters fed up with huge rent hikes.
These factors led some analysts to downgrade a few multifamily stocks. Chief among them: Archstone-Smith (NYSE: ASN). Four firms—Goldman Sachs, JP Morgan, KeyBanc Capital Markets, and UBS—dialed back their recommendations for the company to hold or neutral. (Hanley Wood, LLC, which publishes MFE, is owned by affiliates of JPMorgan Partners.)
“More often than not, Archstone is on the forefront of the rent spectrum,” says Alexander Goldfarb, a multifamily analyst with UBS, which downgraded ASN stock in February. “We think they’ll have a harder time getting the same type of increases they have been going forward.” That’s because residents are becoming more sensitive to rent increases and may walk—to a lesser-priced apartment or into a for-sale home—they feel landlords have hiked too high, he says. “We think the rent growth they have gotten over the past couple years, they won’t be able to get in the next year from marginal rentals,” Goldfarb notes.
For his part, Archstone chairman and CEO Scot Sellers isn’t too concerned with analysts’ quarterly views. “We don’t focus our attention on short- term changes in ratings,” he says. “We do what we believe are the right things to create significant long-term value for our shareholders, and our track record in this regard is very strong.”