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Apartment Market Finally Sees Pickup

Real Estate & Development

TRACY ADAMS | The Daily News

For the first time in the past few years, the Memphis multifamily housing market is gaining strength, and all signs point to growth in the year to come.

"The last couple of years have been very challenging for our business due to the fact that the pricing of single-family or for-sale housing alternatives has been very tempting for our residents," said Mark Fogelman, president of Memphis-based Fogelman Management Group. "In many cases, (renters) were able to buy a home for a lower monthly payment than actually renting an apartment. We lost a lot of residents over the last couple of years.

"But things are turning around. Quarter by quarter, the year has been picking up in growth."

Fogelman Management Group manages 41 multifamily properties totaling 16,000 units in 10 states, including 5,800 units in the Memphis market.

Positive numbers. The overall numbers for the Memphis multifamily market have been positive in the first three quarters of 2005, with increasing occupancy rates, rental rate gains and absorption that has outpaced the delivery of new units, according to a third quarter report by commercial real estate services firm CB Richard Ellis.

The report showed significant occupancy increases of 1.4 percent and 3.4 percent for 1980s construction and new construction, respectively. The largest increase among all categories was in Downtown Memphis, where new construction showed a 5.1 percent occupancy increase.

New construction in Downtown had the area's highest occupancy rate, at 97.3 percent. It was followed by Raleigh/Bartlett and Cordova/Germantown, which saw new construction occupancy rates of 95.8 percent and 94.9 percent, respectively.

Older construction in the Raleigh/Bartlett and Cordova/Germantown markets also showed positive numbers for the third quarter. Both areas saw an occupancy increase of 1.9 percent.

Higher absorption. Absorption in the third quarter more than doubled third quarter 2004 figures, with 1,156 units absorbed. The number of units absorbed was affected in part by Hurricane Katrina evacuees who needing immediate housing, Fogelman said.

"Unfortunately, Hurricane Katrina evacuees have contributed positively to our industry," he said. "Our company manages about 5,800 units locally, and we have leased to about 90 families that were fleeing Hurricane Katrina. Of that 90, about 50 remain with us today."

CB Richard Ellis predicted that many Katrina evacuees will stay in the Memphis area on a long-term basis, said Blake Pera, vice president of CB Richard Ellis' Memphis Multifamily Division.

"I do sense that those residents are longer term than displaced residents in Houston, Texas, and some other markets," Pera said. "From what we are hearing in the market, I think these people are continuing to stay."

Overall absorption through the third quarter was 1,156 units, which includes 257 1980s-built units and 1,206 new construction units, according to the report. New construction absorption was attributed to increased occupancy in the category and the delivery of 803 new units.

"The 1980s and new properties are doing really well," Pera said. "It is an encouraging sign that our market is turning the corner."

Rents finally increasing. Rental rates increased by about 1.5 percent in the third quarter, according to CB Richard Ellis. The data showed that the average market-wide rent was $658, compared with $651 at year-end 2004.

"2005 has been the first year in five years that we have had some pricing momentum behind us where we can rent a unit to a new resident at a higher rate than we rented to the previous resident," Fogelman said. "We're looking for that to continue in the coming year."

The East Winchester submarket experienced the largest rental rate gain among old construction properties, with a 3.7 percent increase, Pera said. In DeSoto County, where researchers found the highest rental increases among 1980s-built properties, rates increased by about 10.3 percent.

The growth experienced in the Memphis multifamily market could mean increased rental rates in 2006, Fogelman said.

"Over the last several years, a two-months-free rent giveaway has been very common in the market," he said. "We had higher occupancies, but the rental rates on a net effect basis were not positive.

"The city is experiencing improved job growth, there has been a lack of new apartment construction and interest rates are creeping higher, which all favor our industry. Our big focus is not going to be on occupancy in the coming year, but on pushing rental rates higher."

Continued growth. Fogelman also predicted the growth trend established this year will continue in the current quarter and into 2006.

"New construction, job growth, price of for-sale housing - these three factors are all starting to line up very nicely for us because we are at record lows for new apartment construction, jobs are improving and hopefully interest rates are improving, as well," he said. "We are bullish on the apartment market for 2006."

Pera agreed.

"I think we will continue to see an uptick in occupancy in the next several quarters," he said. "I would expect similar levels, with continued occupancy in the A and B properties in the mid 90s or better in 2006."