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The competition from single family homes as an
alternative to renting is often cited as a deterrent to apartment investment.
The progression of renters moving to single family ownership is expected
to be mitigated by the following factors:
- consumer attitudes toward owning a home as
an investment have faded with low inflation and a soft market,
- continued corporate relocation and job uncertainty
make many people unwilling to buy,
- the rate of savings in the U.S. is very low
resulting in first time buyers that have difficulty saving the necessary
down payment, and
- increased apartment quality makes it an acceptable
alternative to owning a home.
In reality, the aging population can be a benefit
for the apartment investor. Typically, older renters are less mobile and
cause less "wear and tear" on improvements which translates into longer
tenant retention, lower capital improvements and lower turnover costs. These
costs can be substantial and significantly alter bottom line cash returns.
A 10% reduction in turnover can add 30 basis points to the return. Older
tenants typically demand more direct and indirect services which allow for
larger margins and additional revenue sources. Security, privacy and physical
quality become much more important. The demands for active property management
increase, but so do the opportunities for rewards.
Apartment construction has declined steadily since 1985. Multifamily starts
peaked in 1985 at 576,000 units and dropped to a 35 year low of 138,000
units in 1991. Current construction is unlikely to keep pace with demolition
and conversion. Inventory has actually declined recently and at best is
expected to stay flat over the next few years in many markets. Vacancy rates
in major markets have dropped from 10% several years ago to about 5-6%.
Rents are actually rising significantly (5-7%) in the stronger markets.
In many communities, zoned multifamily land is scarce, which makes future
development even more difficult. Government regulations for new apartment
development are becoming more stringent which increases the cost of new
construction. In-fill properties in strong markets tend to have a monopolistic
position. In those markets where single family alternatives are relatively
expensive the market remain tighter than others.
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