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Apartment properties may gain favor as investment.

Apartment properties may gain favor as investment

According to Steven J. Manolis of Salomon Brothers an unprecedented combination of demographic, social, economic and regulatory trends could elevate existing apartment properties to the status of "investment of choice" during the coming months.

"Apartments are the only property type in which supply and demand are now roughly in balance," said Manolis, a managing director of Salomon Brothers and the head of its real estate unit. "That equilibrium, coupled with the fact that demand looks set for a sharp upturn, should spark interest among a variety of investors."

Manolis says that pension funds, syndicators, high-net worth individuals, insurance companies and public and private partnerships are all potential participants in the coming acquisition market for apartment properties.

Behind the trend on the supply side, Manolis said, are the steep decline in new housing starts, which reached a post-war low earlier this year, and public policy restrictions, which could stymie attempts at adding new multi-family stock in many fast-growing areas of the country.

"The dearth of new construction occurs at a time when there are high shifts in population," said Manolis. "Not only is immigration into the United States from other countries significantly up over the last three years, but interstate migration is on the rise as well."

At the same time, Manolis noted, hostility toward new apartments in many communities is keeping zoned land scarce and stretching out the permitting process.

"In California, for example, permitting can take more than four years, and impact fees have become a painful fact of life for developers," said Manolis.

Driving the demand side are widespread, long-term changes in the nation's way of life, Manolis believes. The increased number of older single and young people living alone, the advent of smaller households and an aging population that is gradually trading in its single-family homes for apartments are factors that Manolis says will keep demand for multi-family housing brisk.

And the combined effect of the demographics, he believes, is likely to outweigh factors that would normally signal a slackening in demand.

"Even after factoring in the lower rate of household formations and the anticipated decline in the numbers of people in age ranges traditionally associated with apartment rental, the overall demand curve still looks quite healthy," said Manolis.

But for all its allure, Manolis warns, investment in multi-family housing has its dangers. "As with any property type there are fundamental risk factors," he said. "If interest rates decline significantly, and home prices continue downward, for example, single-family residences could become a competitive alternative for many tenants."

Political risks also exist, Manolis says. "Rent control, tenant rights legislation and hikes in property taxes are always a possibility, particularly in areas where apartments have become extremely prevalent."

But perhaps the biggest drawback for many investors will continue to be the management and operating risks inherent in multi-family housing. "Apartments are among the most management intensive of all property types, and the operating expenses involved can consume 30 to 50 percent of revenue," he noted.

But for those sophisticated investors willing to accept the fundamental risks, extra responsibilities and added costs, Manolis says, apartment properties can offer some compelling characteristics.

"Values in many markets are well below replacement costs, the long-term outlook is bullish and there is no large backlog awaiting absorption," said Manolis. "In this climate, that's an unusual and valuable combination."
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Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Publication:Real Estate Weekly
Date:Jun 26, 1991
Words:561
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