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Monday, November 02, 2009
Averting Adversity
By Richard Metcalf
Copyright © 2009 Albuquerque Journal Journal Staff Writer
The resilient ranks of apartment renters in the Albuquerque metro area have held up well despite rising unemployment and a shrinking job sector.
An occupancy rate of 93-plus percent, together with stable rents, are signs of a local economy that "may not be robust, but it hasn't been horrible," said John Rials, a managing partner at Charleston, S.C.-based Greystar Real Estate Partners.
For an apartment market coping with a horrible economy, you don't need to look any farther than Santa Fe.
The vacancy rate there was 87.8 percent in September and rental rates were down a little over 15 percent from a year earlier, according to the Eagle Multi-Housing Team at CB Richard Ellis' Albuquerque office.
"It has suffered somewhat the same fate as Phoenix and Las Vegas (Nev.) in occupancy and rents," said apartment broker David Eagle.
Rials and Eagle were panelists at the recent Apartment Association of New Mexico's recent Fourth Annual Apartment Industry Economic Forum held at the Marriott Pyramid Hotel. The backdrop for this year's forum was the delayed impact of the recession on apartments across the country.
"Almost the entire national apartment industry fell off a cliff at the beginning of the year," Eagle said.
In this region, Phoenix is the poster child for a metro area where the recession has devastated the apartment market.
The occupancy rate was 87.8 percent in the third quarter, down from 90.1 percent a year earlier, according to Novato, Calif.-based RealFacts. The average monthly rent was $761 in the third quarter, down 5.6 percent from a year earlier.
A bloodbath elsewhere
More importantly to the owners, revenue is down by an average 10 percent at apartment properties in Phoenix, said Rials. The result has been heightened competition to attract tenants with rent concessions.
"Banners everywhere," he said. "For the first time in my career, I saw six months of free rent (offered). It's a bloodbath."
Both occupancy and rents are also down in Denver and Las Vegas, Nev. A common thread between those two cities and Phoenix is job losses higher than the national average of -4.2 percent as of September.
Economic growth in New Mexico didn't turn negative until the final quarter of 2008, roughly a year after the national economy went into recession, said economist Larry Waldman of the University of New Mexico's Bureau of Business and Economic Research.
"That was the beginning of the recession in New Mexico," he said.
Modest job losses in 2008 accelerated to minus 2.6 percent by the second quarter of this year and preliminary numbers put the losses at minus 3.5 percent in the recent third quarter, Waldman said. Statewide job losses are expected to continue increasing, with minus 4.0 percent possible in the first or second quarter of 2010, he said.
"Employment will get a smaller negative as we move forward from there," he said. "We entered the recession a year after the national economy and will leave it a year after the national economy."
As of September in the Albuquerque metro, job losses were slightly higher than the statewide average at 3.8 percent. The unemployment rate reached 8 percent in the metro, compared to 7.7 percent statewide and 9.8 percent nationwide.
Job losses are bad news for a local apartment market. When the economy is good, both occupancy and rental rates inevitably rise. The opposite happens when the economy is bad.
Defying the trends
But the metro's recent job losses have yet to really play out in the apartment market.
Here's two measures of the local apartment market, both based on surveys of apartment owners and managers:
• According to CB Richard Ellis' Eagle Multi-Housing Team, the metro's occupancy rate dropped from 95 percent in September 2008 to 93.2 percent in September of this year. What's really surprising is the average monthly rent edged up from $688 in September 2008 to $690 in September of this year.
•According to RealFacts, the metro's occupancy rate dropped from 93.9 percent in the third quarter of 2008 to 93.4 percent in the same quarter this year. During the same period, the average monthly rent also ticked up from $732 in 2008 to $737 this year.
Albuquerque was one of only seven of 33 metros tracked by RealFacts with a year-over-year increase in rents.
The resiliency of Albuquerque's apartment market was attributed during the forum discussion to reasons typically used to support the belief that the recession's impact isn't as bad here as elsewhere.
Government jobs – one out of every five jobs in the metro is a direct government job – and continued demand for trained health care workers bolster the local employment picture. The University of New Mexico, Kirtland Air Force Base and Sandia National Laboratories help to stabilize the local economy.
But the typical reasons can't explain away job losses not seen since the early 1940s and unemployment rates not seen since the mid-1980s. Albuquerque's most recent apartment occupancy rate of 93-plus percent is not far off the rate seen in normal economic times. The uptick in average rental rates defies economic trends.
How low can you go
"The only explanation that I have is that our rents are quite low in comparison to the full costs of home ownership," Eagle said, thus encouraging apartment living.
In RealFacts' data on apartment markets in 33 metros, Albuquerque's average monthly rent of $737 was sixth lowest in the third quarter. Albuquerque has had the sixth lowest rents for several years. Nonetheless, it's cheaper to rent an apartment than buy a house or condo pretty much anywhere in the country.
Another factor might be the nature of Albuquerque's labor force. Quite possibly a higher proportion of the metro's workers are homegrown or otherwise rooted here than found in other metropolitan areas around the country, Eagle observed.
"They may have lost a job or had hours cut, but have to live somewhere and Albuquerque is their permanent home," he said.
Another factor might be that the majority of apartment properties here were purchased at the right price with appropriate leveraging, thus enabling the owners to charge rents that tenants are willing to pay. Eagle noted that there have been no foreclosed apartment properties in Albuquerque and few, if any, in financial trouble.
The short-term forecast for the local apartment market is flat rents and revenue through the first quarter of 2010, according to Rials. Occupancy will likely go down, as is the tendency from early fall to late winter.
Rents and revenue will see "nominal growth," 1 percent to 3 percent, in the second and third quarters of 2010 as apartment-renting activity picks up during the summer, he said. Next year will likely end on a flat note.
Another forum speaker — Bill Whalen, capital markets director of San Francisco-based Hamilton Zanze & Co. — said Albuquerque's apartment market won't see appreciable improvements for another 12 to 18 months. In contrast, metros like Phoenix and Las Vegas won't see improvement for two or three years, he said.
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