Thursday, September 30, 2010

Apartment Sector Showing Improvement

The underlying fundamentals of the apartment sector are beginning to show improvement.  Consider the 3rd quarter report released from MPF Research:

- Occupancy rates rose to 93.9%, up 2.1% since the bottom in 2009

- Effective rent prices have increased 1.2% from mid 2010 and 2.6% year to date

- 3rd quarter apartment additions were limited to 12,000 units

- 2010 apartment additions have been limited to 48,000 units

This is the free market working itself out.  There is no financing available for new apartment construction (and there is no new supply needed) so it has essentially stopped.

As more homeowners lose their homes to foreclosure or make the (correct) decision to rent, it increases the price of available apartments.

So what is the problem?

The prices being paid for apartments is still too high.  Investors are accepting too low a rate of return for the income a property generates. (cap rate)

The question will ultimately be whether the Federal Reserve bails out the commercial real estate loans that need to be refinanced over the next 3 years.

If they do not bail out commercial real estate, nominal prices will fall to attractive investment levels.

If they do bail out commercial real estate, prices will fall to attractive levels priced in gold.

Either way a tremendous opportunity will be coming, and you can see this by the fundamentals improving for the sector as a whole.

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