National market analysis: fundamentally sound: some analysts claim that the apartment market has peaked and is set to take a downward turn--but fundamentals are proving them wrong.

The apartment industry is performing at a record clip, prompting some industry analysts to suggest that what goes up is bound to come down.

That cliche may hold true, but value levels haven't seen the top yet, according to leading multifamily housing brokers. The outlook for the apartment industry isn't nearly as gloomy as some analysts seem to suggest.

Whether an individual real estate investment trust (REIT) is overpriced is yet to be seen, but as an industry, all signs look good for the immediate future.

The Fundamentals

In most markets, such as Atlanta, Charlotte, Denver and Dallas, the apartment investment fundamentals are as strong as ever. The fundamentals--that is, low pipelines on new apartment construction compared to historical growth, reduction in concessions, higher occupancies (94 percent and higher), rental and job growth--are at the "beginning" stage, ramping up over only the past 12 months from a previous four-year period of weaker market factors.

For instance, Atlanta posted job growth year over year of 100,000 jobs and a new-construction pipeline of 4,500 units per year compared to recent highs of 16,000 units per year.

"This is the best job growth that Atlanta has seen for six or seven years," said Derrick Bloom, ARA President and Atlanta Principal. "Oversupply is not a problem at all in Atlanta or most any market because of high construction costs, longer county, and city approval periods, and high land costs that have been driven up by the single-family market during the past three years."

Bursting the Bubble

The recent historically low interest-rates made buyers out of many renters. But rising interest rates, median-home costs, insurance premiums and real estate taxes are swinging the economic pendulum back to a market in which people may prefer renting.

There is speculation that the single-family housing bubble has burst and the market has shifted from a strong seller's market to a buyer's market. For example, sellers are now offering more incentives and discounts and that could affect the rental market, forcing prices and profits down.

But, in fact, the opposite might ring true. When single-family homes are not selling or are selling slowly, renters are not moving out of apartments to buy.

"Compared to the past four years when most renters left apartments to buy single-family homes or condos because of extremely low interest rates, apartments should perform much better," Bloom said. "The flood of people leaving apartments to buy appears to be over, despite any discounts or incentives. The result is higher occupancies and, therefore, higher rental rates."

Additionally, there are significant demographic changes taking place. The Echo Boomers, the children of the Baby Boomers, are just now becoming renters. Born between 1982 and 1995, these nearly 80 million young people are leaving home and entering the workforce, and they're primed to make direct and indirect impacts on the apartment industry.

"Baby Boomers are empty-nesting into luxurious, highly amenitized and professionally serviced apartment communities," Bloom said. "And their children, the Echo Boomers, are leaving the nest for the first time and are spilling into the rental market."

Between economic factors that are leading people back to renting and an influx of an enormous new generation of renters, national apartment fundamentals are sound. These conditions will lead to increased occupancy and rental rates.

Florida: The Multifamily Mecca

Some analysts claim that apartment fundamentals have peaked and are set to take a downward turn--especially in Florida, a state that has been the poster-child for the condo-conversion craze.

Speculation suggests the combination of a slowing economy and declining job growth-rate would weaken the demand for apartments. Additionally, recent announcements of REIT plans to ramp up development could seem to create an oversupply of apartments. The implication being that the sum of these factors could create a "perfect storm" of plunging apartment fundamentals.

In truth, Florida knows all about storm conditions and this simply isn't happening in the Sunshine State.

"Florida won't experience long-term decline in apartment fundamentals at all," said Dick Donnellan, ARA Florida Principal. "Occupancies and rents are up. Construction costs are still high, as are land prices, making it difficult to get new deals to pencil out. It's difficult to build in Florida and we keep growing jobs. The fundamentals should remain strong over the foreseeable future."

Donnellan said he expects rent growth in some Florida sub-markets to level over the next 12 months, from the current 9 percent to approximately 5 percent as the condo conversion "shadow" market is absorbed.

"The decline in rent growth will be short-lived because of new development in Florida being at a historic low," Donnellan said. "With the continuing job growth in all Florida markets, there is a real need for the shadow rental units right now, and there aren't a lot of units available because they've been converted and purchased."

Florida has quieted some from recent years' conversion activity, but the outlook is strong. When compared to its contemporary markets of New York and California, Florida rents are still relatively inexpensive and the state doesn't impose an income tax. The land is difficult and expensive to develop, which creates a barrier to entry that will keep a lid on supply. All those reasons point to basic rules of supply and demand, keeping the fundamentals tipped heavily in favor of the apartment owner.

"2005 was the year of the converter; 2006 and 2007 will be known as the years of the income buyer," Donnellan said.

Changes for the Better

Certainly the apartment market is changing, and REIT investors are probably leery of those changes. But, in this case, change is good.

The market was a little off for the past couple of years with the coastal markets being crazed by condo conversions because of historically low interest rates, but that is beginning to normalize. All indications seen] to point to steady and strong apartment fundamentals, and that should translate to more solid REIT investments.

Lisa Robinson is National Director of Operations for Apartment Really Advisors, She can be reached at [e-mail] or 678/553-9360.