“While the shadow market and doubling up might not in and of themselves be so damning, when you begin to put those factors together, it becomes a serious problem,” explains Terry Slattery, president of Norfolk, Va.-based For Rent Media Solutions, the parent company of internet listing service (ILS) ForRent.com. “Neither of those things are going to change anytime in the near future, at least not until this economy turns around. I’ve been at this for more than 20 years, and I don’t think anyone knows exactly what is going to happen.”
Clearly, markets that saw intense overbuilding on both the single-family and multifamily side—and we’re talking the Phoenixes and the Las Vegases of the world—are seeing fundamentals plummet just as drastically as their once meteoric rise. Several multifamily operators with high asset concentrations in those markets—including Bethany Holdings Group, The Bascom Group, and most recently, Fairfield Residential—have been forced into survival mode and even bankruptcy. And firms remaining in the market are not oblivious to the continued threat posed by poor rent fundamentals.
“Where you first saw the rapid escalation in rents and construction activity is also where you are seeing the greatest stress,” says Jeff Olshan, vice president of multifamily asset management for Irvine, Calif.-based Passco, a 1031 exchange owner/operator and fee manager of 12,000 units in markets across the country. “So the competition in a market like Phoenix is exaggerated and exacerbated by the tremendous amount of supply and constrained demand from cohabitation, from renters moving back in with family, from trade-downs, and from moves into single-family shadow rentals.”
Milestone Management regional vice president of property operations Beth Van Winkle is keenly aware of the relative difference in regional rent fundamentals—her markets include Phoenix, Austin, Houston, and San Antonio. But despite the geographical market balance hedging her portfolio (San Antonio and Austin are expected to lead major MSAs with job growth approaching 3 percent next year, according to Marcus & Millichap), Van Winkle nevertheless describes a 2010 likelihood of average portfolio rents and occupancies remaining flat at best.
Research data across the board backs up those assumptions. Average rents in the Phoenix/Mesa/Scottsdale metro area are $695 with an 87.1 percent occupancy, according to RealFacts, a Novato, Calif.-based apartment research firm. Marcus & Millichap likewise sees asking rents in Phoenix declining from a 2009 year-end average of $748 to a 2010 projected year-end average of $729, assuming a 12.6 percent vacancy. In Austin, RealFacts reports an average 2009 rent of $807, while Marcus & Millichap finds an average 2009 year-end asking rent of $844 and projects virtually flat asking rent growth in 2010 to $849. San Antonio, meanwhile, seems to be looking at further softness. Although average 2009 rents checked in at $712, according to RealFacts, Marcus & Milli-chap reports year-end asking rents of only $685, a figure they anticipate to remain flat across 2010.
Market realities that Milestone knows all too well. “Our Texas markets have been fairly well-insulated, and we did not take as big of a hit there,” Van Winkle says. “We think we’ll bounce back fairly rapidly starting in the first or second quarter in Texas, but I am still very concerned about our Phoenix and Las Vegas markets, which, not surprisingly, remain in the lower tier of our portfolio. But we have seen flattening in those markets, and do anticipate the possibility of an uptick, but not until mid- to late-2010.”
Preparing Portfolios
With occasional spikes as new communities came online in 2009, Van Winkle has maintained occupancy levels across her portfolio in the low- to mid-90 percentiles, a feat she attributes to the market experience and dedication of Milestone on-site staff as well as to the unfortunate, but necessary, use of rental concessions.
“2009 was a year of strong concessions,” Van Winkle says. “Portfolio-wide, we have seen concessions almost double from where they were in 2008. In new construction lease-ups, market concessions have gone from two weeks to even three months in some instances, and in stabilized assets have likewise gone from zero or two weeks to a pretty standard one-month concession. We have tried very hard to maintain occupancy, especially in light of these types of concessions prevalent in the market.”
