Apt. report: Downturn will be 'brief pause' in economic growth.

Marcus & Millichap Real Estate Investment Brokerage Company recently released its Apartment Research Report for the Manhattan market, which indicates that the current downturn will be a brief pause in the long-term growth of the local economy, according to Mitchell LaBar, regional manager in the firm's Manhattan office.

"The local apartment market has been in a temporary lull, as the renting frenzy cooled over the last year," notes LaBar. "Average vacancy will rise slightly in the near term and lead to only moderate rent growth in 2002. But as the economy begins to turn around, the market will get back on track and return to its typical trend of high rent growth and rapid price appreciation."

Following are some of the most significant aspects of the report:

* Job growth fell below 1% in 2001, and the forecast is for even softer growth in 2002 as the effects of Sept. 11 continue to be felt in Manhattan. Job losses in the F.I.R.E. sector totaled nearly 25,000 from September to October 2001, and although many of the lost jobs will return to the local market this year as the economy begins to rebound, some will remain in other cities in the tri-state area. While the local population will experience trying times in the short term, the resiliency of the workers and residents will ensure the long-term success of the Manhattan market. The F.I.R.E. sector, a primary driver of the local employment market, lost more than 5.5% of its jobs from June to October 2001.

* Apartment construction is forecast to slow throughout New York City this year, due to slightly softer demand from limited job growth. Construction completions in New York City are forecast to decline in 2002, as the current economic conditions and expected declines in job formation have put developers in a holding pattern. Much of the current construction activity began in early- to mid-2001, and a good portion of that development has been in or near downtown. As a result of the events of Sept. 11 and the ensuing chaotic conditions in the area, many of those projects have been thrown off schedule or placed on hold indefinitely. While the majority of the access routes throughout the city have been restored, construction activity has certainly been more difficult to execute than normal.

* The rental market had begun softening by mid-2001; the events of Sept. 11 added further strain. Average vacancy is forecast to rise over the next year, but will remain under 4.5% Job growth will be at its most anemic level since the country's last recession in the early 1990s, which will cause the market to continue its softening trend of the past few quarters. High-end rental units will be most affected, as competition will be less fierce than usual and residents will opt for less-costly housing choices.

* Double-digit rent growth will be replaced with moderate increases averaging 4%. Rents will continue to rise over the next 12 months, but increases will be unlike typical Manhattan growth. The double-digit gains of years past will drop to moderate increases of 4% on average. Effective apartment rents had begun to retreat in the second and third quarters of 2001 in response to a job market that was already showing signs of weakening. Asking rents have declined considerably over the past several months, and concessions have become more commonplace in the market. Despite its early struggles, the Manhattan apartment market is forecast to rebound in step with the economy by the second half of this year. Rent gains experienced toward the end of the year should make up for the early poor performance and lead to slight growth.

* Apartment properties will continue to appreciate over the next 12 months, although the rate of growth will decline from that of previous years. While rents have softened over the past 12 months, property values will rise in 2002 as investors continue to covet Manhattan real estate. International investment in the region may cool somewhat due to the perceived risk involved with owning real estate in New York, which has come to light since Sept. 11. High prices have historically caused many investors outside the region to avoid investing in local real estate, but the stigma stemming from the destruction of the World Trade Center also will deter outside investors from shopping the area, at least in the short term. Nevertheless, the concentration of property owners in Manhattan is over-whelmingly local, and the current lackluster apartment market should bring out the local investors in search of properties with long-term upside.

For a copy of the complete Manhattan Apartment Market Report, as well as reports on 27 other markets nationwide, access our website at www.marcusmillichap.com.