Apartments are sexy. Sexy is simple, smart, conservative and looking for a long term relationship. Some who read this article will immediately want to argue that statement. However, in Utah right now it would be hard to argue otherwise.
So let me explain. I originally started brokering apartments because I am conservative by nature, and apartments in the greater Salt Lake City area are arguably the most conservative commercial real estate investment play out there. Utah is a safe bet. Owning apartments in Utah has proven to be like buying an insurance premium for your money.
Adjectives like conservative and safe are not the typical words used to describe sexy. However, perspectives, opinions and definitions have changed recently, which is having an enormous effect on the overall Utah apartment market.
Before I attempt to explain why apartments are sexy, first I’ll clarify what sexy meant prior to the recession. The exact start date of the recession seems to be as much personal as it is statistical, and for me it was October 2007 – very personal.
Prior to October of 2007, sexy came in all shapes and sizes, and the “investment of a lifetime” came by my office at least once a week. Chasing high yield was sexy. Hard money loans were sexy. Refinancing the equity out of your home to develop residential lots was sexy. Buying a second home because you could – super sexy. Sexy was telling a conservative safe deal at 8 percent “no” because your neighbor had a deal that was guaranteed to pay 25 percent plus you get a back rub. Safe, conservative apartments were not sexy.
As the Oracle of Omaha, Warren Buffet, has often been quoted, “What matters most is not the return on your money, but the return of your money.” Chasing yield became costly quickly. Retail, office and industrial investments have been off as much as 30 to 40 percent from their pricing at the peak of the market in 2007. A high percentage of those properties are now worth less than what is owed on the property. People have lost money, and the definition of sexy has now been completely re-written.
Sexy is now simple, smart, conservative and looking for long-term relationships. This “flight to quality” has pushed Class A investments up in value, resulting in an upward pricing pressure on conservative solid investments like apartments in strong markets such as Utah.
Apartments are now sexy.
Commerce Real Estate Solutions Annual Apartment Market Report reveals that Utah is at the tipping point of trends that have already received national attention: declining vacancies and increasing rents. The Utah market is expecting vacancy to decline below 5 percent and rental increases upwards of 6 percent over the next year. Utah apartments have hit the national radar in a big way. The stability and strength of apartments, coupled with the anticipation of rent growth, reduced upcoming new inventory. Changing national multifamily trends have positioned Utah apartments so well that they have become the new definition of sexy.
To say the Utah apartment market is hot would be a gross understatement. An unprecedented amount of equity and debt are actively looking to acquire apartments in Utah. Money is chasing yield, but it is chasing fair yield with the potential of upside. Through the end of the year, CAP rates will continue to be compressed and values increased. Vacancy will continue to decline, which will put upward pressure on rents. Utah is headed into a landlord-friendly market where apartments have become sexy.
What is driving rents up as well as apartment values? Currently, there is a reduced supply of new product coming online this year versus the last two years. The number of units that have come online each year in Salt Lake County, going back to 1980, average 1,427 units per year. In 2009, 2,442 units were added with another 819 in 2010, which was a large influx of new product that was absorbed and continues to be absorbed. This year, through April 2011, only 193 units have been added.
New supply, in the short term, will continue to see a decline for several reasons. The primary reason for the lack of new product is the dearth of availability of financing. The principle financing source of apartment development has been HUD. The lack of available ground poses physical barriers. Finding cities willing to zone or permit new apartments is another road block. These barriers will continue to make it difficult to get apartment approvals. There is also a new generation of “lifestyle renters,” people, who for mobility, inability to buy a home and/or for less stress in their lives, have chosen to rent instead of own. Statistically, the number of renters has grown over the last five years, and research shows it will continue to grow.
The new definition of sexy will continue to have a huge effect on the Utah apartment market. After two years of difficult operations, tenant skips and concession wars, owners are staring into a landlord market and are preparing to reap the rewards. Now is the time to start increasing rents and positioning assets for higher cash flow and/or a potential sale. Capitalization rates will continue to be compressed as rents rise. Values, after being somewhat stagnant for a while, will begin to rise. Barriers will keep competition away in the short term.With vacancy expected to dip below 5 percent in Salt Lake County this year, apartments offer a low-risk investment with a foreseeable and predictable strong future. Conservative and safe are the new pretty girls in town.