REAL ESTATE REPORT - REDI-net.com

RERC © REAL ESTATE REPORT - THE NATIONAL REAL ESTATE AUTHORITY
APARTMENT
n RERC’s institutional investment survey respondents continued
to recommend investing in the apartment market during
fourth quarter 2010. Financing and capital availability for
the sector is good, and vacancy rates are low. In addition,
distressed apartment properties are available. However, a few
respondents noted that high demand and tight supply are
causing overpricing in some areas.
n RERC’s investment conditions rating for the apartment sector
declined to 6.8 on a scale of 1 to 10, with 10 being high, during
fourth quarter 2010. Although the apartment sector continued
to receive the highest rating compared to the other
property sectors, survey respondents found the investment
potential for the sector less attractive than during the previous
quarter, when the rating was 7.3 on the same scale.
n RERC’s required pre-tax yield rate for the apartment sector
declined 50 basis points to 8.0 percent during fourth quarter
2010. The required going-in capitalization rate for the apartment
sector decreased 50 basis points to 6.0 percent, while
the required terminal capitalization rate fell 60 basis points to
6.6 percent.
n Compared to the previous quarter, the expected rental
growth for the apartment sector increased 20 basis points to
3.1 percent, while the expected expense growth rose 10 basis
points to 2.8 percent.
n According to Reis, Inc., the national vacancy rate for the apartment
sector dropped sharply to 6.6 percent in fourth quarter
2010. In addition, occupied stock increased by nearly 58,000
units for the quarter, with absorption for the year 2010 totaling
over 227,000 units. Asking and effective rents continued to
increase at approximately 0.5 percent.
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RERC Risk & Return Analysis - 4Q 2010
10-Year Average Returns 4-Quarter Rolling Returns
NCREIF Returns 7.43% 18.21%
NCREIF St. Dev. 11.77% 11.77%
RAR* Metric 0.6 1.5
RERC Returns 9.15% 8.40%
NCREIF vs. RERC -1.72% 9.81%
*RAR = Risk-Adjusted Returns.
Sources: RERC, NCREIF.
RERC Apartment Performance Cycle
Real Difference*
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
-30%
-35%
4Q 2000
4Q 2001
Market Equilibrium
Apartment
4Q 2002
4Q 2003
4Q 2004
4Q 2005
Sources: RERC, NCREIF, 4Q 2010.
*Difference between NCREIF realized and RERC required returns.
Apartment Investment Criteria Trends
12%
10%
8%
6%
4%
4Q 2000
4Q 2001
Source: RERC, 4Q 2010.
4Q 2002
4Q 2003
4Q 2004
4Q 2005
4Q 2006
4Q 2006
WINTER 2011 | VOL 39 | NO 4
4Q 2007
4Q 2007
4Q 2008
4Q 2009
Terminal Cap Rate
Going-In Cap Rate
Pre-Tax Yield
4Q 2008
4Q 2009
4Q 2010
4Q 2010
15%
10%
-10%
-15%
-20%
-25%
-30%
-35%
© 2011 REAL ESTATE RESEARCH CORPORATION. ALL RIGHTS RESERVED.
5%
0%
-5%
12%
10%
8%
6%
4%