The apartment sector has cemented a privileged position atop the commercial real estate investment hierarchy. Across a broad swatch of the nation’s markets, declining vacancy rates and accelerating rent growth have converged with low-cost financing to foment a sustained rebound in investment flows and a recovery in pricing unmatched in its geographic balance. Distinguished even further from other income-producing property types, the apartment sector has recorded a small but observable increase in development activity and has been the only sector to show a net increase in regional and community bank lending.
The apartment sector’s proponents argue that recent gains reflect a structural shift in the housing landscape, with millions of young American families now disabused of the notion that homeownership is always preferable to renting, and embodied in a long-term policy retrenchment from mortgage subsidies and market-making. In support of this thesis, advocates can point to data showing a surge in rental households and a corresponding decline in the homeownership rate. Between early 2006 and late 2010, the renter pool in the United States increased by more than 10 percent, at a faster pace than household formation or rental supply.
The descriptors of the apartment rebound offer a compelling but ultimately incomplete picture of an exceptionally mutable housing market. There is no doubt that national apartment trends are outdistancing an ownership market that remains mired in its own localized recession. Still, investors must proceed deliberately, remaining cognizant of risks to their baseline expectations. While conditions in the apartment sector warrant a sanguine assessment, investors and lenders alike must guard against the potential for unabated enthusiasm to inflate prices and erode lending standards to the detriment of long-term stability.
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