Pulse on the Marketplace — Apartments in a Post

A Quarterly Review of Key Financial Data for the

Total Apartment Sales Transactions

Total Sales Volume

40 55 67 3,912 3.952 5,880

$419 Million

$756 Million $1.45 Billion $52.4 Billion $54.1 Billion $139 Billion

• Actual Average Cap Rate 4.25 4.14 3.56 5.46 5.28 4.45

• Average Gross Rent Multiplier 15.01 14.77 16.72 13.85 13.43 14.82

• Price per Square Foot $404.91 $356.70 $388.27 $174.51 $167.56 $227.46

Source: Co-Star www.costar.com 5 unit + properties

• Price Per Unit $343,869 $335,080 $428,390 $167,376 $169,578 $229,721

Average Rent Level

$2,149 $2,140 $2,512 $1,427 $1,418 $1,577 Source: RealPage, Inc. www.realpage.com Annual Effective Rent Growth 2.9% –1.0% 16.7% 3% –1.2% 13.8% Primarily 100 unit + properties; “concession percentage” is the Concession Percentage 2.4% 3.9% 3.8% 3.4% 5.7% 6.0% percentage of units offering concessions.

Average Occupancy Rate 96.4% 96.8% 98.8% 95.7% 95.6% 97.4% Source: RealPage, Inc.

Average Monthly Employee Wages** $4,961 $5,241 $5,481 $4,287 $4,500 $4,719 Source: US Bureau of Labor Statistics; uses private sector wages, last month of quarter;

Apartment Building Permits Issued by total # of units (not buildings)** 2–4 Units 466 463 481 10,700 13,300 13,800 Source: U.S. Census Bureau: Privately owned, 5+ Units 5,390 4,399 4,206 136,400 119,000 160,200 new construction

Consumer Price Index*

Unemployment Rate** 3% 1.5% 6.6% 2.3% 1.4% 7.0%

3.9% 11.1% 5.6% 3.6% 6.7% 3.9% Source: U.S. Bureau of Labor Statistics; % change using last month of quarter versus same month one year previous Source: U.S. Bureau of Labor Statistics; reflects last month of quarter

Pulse on the Marketplace is produced and edited exclusively for Apartment News by Nick Lieberman, President, Bona Fide Mortgage and AAOC Board Member. For questions or comments: (949) 651-0999, or nlieberman@cox.net

* For CPI, “Orange County” includes Orange, Los Angeles, and Riverside Counties. ** For Apartment Building Permits, Average Monthy Employee Wages and Unemployment Rate, “Orange County” includes the Los Angeles–

Long Beach–Anaheim, CA Metropolitan Statistical Area.

By niCk lieBerman

Not to overly dramatize, but does it not feel like we’ve all been enduring a shitstorm (‘scuse my language) of historic proportions?

First it was COVID and the chaos it engendered; then, just as the day-today impact of the virus seemingly began to abate, Russia invades Ukraine, turning the world on its ear; and on top of that we’re now grappling with the reality that inflation — running at 7.9% year over year through Feb 2022 — has infiltrated the economy on a scale not seen in forty years.

With these calamities raining down, what’s an investor to do — buy, sell, or hold?

More to the point for AAOC members, the core question is, “how will

be positioned when the dust settles?“ (and yes, I do believe that we’ll eventually get back to some semblance of order and stability.)

Apartments are, and will continue to be for the foreseeable future, a survivor. Their proven resilience in an economic firestorm is a reason that those preferring a lower risk portfolio may wish to hunker down with multifamily while riding out the turbulence.

In short, in the middle of a crisis when the highest priority is survival and simply getting through extreme conditions intact, rental housing seems a sound play. Certainly stocks, bonds, commodities and other publicly traded securities are fundamental asset classes that normally would and should be part of a balanced investment portfolio, but their prices on any given day are subject to significantly more volatility than are those of rental housing.

As discussed below, the adjacent chart illustrates just how effectively apartments have so far toughed it out under untoward conditions the past two years (we note that our Q4 2021 chart pre-dates the outbreak of war in Ukraine).

Apartments in Orange County reflected an astounding 98.8% occupancy rate at year end 2021, while nationwide occupancy weighed in at 97.4%, a similarly stupefying figure.

Yes, as we all know, pressing housing shortages across the country account for these unprecedented occupancy numbers, but the reality is that it will take years to correct the imbalance, which provides somewhat of a vacancy cushion for the future.

The pace of annual rent growth locally and across the nation is in turbo charge mode: 16.7% year over year in OC and 13.8% nationally. Obviously, this is not a healthy situation for the millions of Americans renters, and it bespeaks of unsettling socio-economic implications for society. But, that said, the situation such as it is does nevertheless augur well for apartment investors. Breakneck speed rent growth will eventually slow, but these rental housing income streams have inertia that will take time to slacken. [To clarify a point concerning 16.7% annual OC rent growth in light of the state’s 10% annual rent increase limits, keep in mind that the law does not apply to many rental situations (e.g. units 15 years old or less and most rerentals after voluntary move outs.]

In the throes of the frazzled marketplace, apartment values finished 2021 at or near all-time highs by virtually all measures (cap rate, gross rent multiplier, price per unit, price per square foot), a testament to the extremely sturdy nature of the asset class. Eventually multifamily pricing will moderate or perhaps even decline — but can anyone name an asset class that’s 100% bullet proof?

At some point we’ll emerge from these particularly challenging times and enter a “post-apocalyptic” phase. In the aftermath, rental housing will still be a bedrock, forever in-demand industry serving the fundamental human need for shelter. So, while apartments may not be the most glamorous or highest yielding of asset classes, they do appear to be among the most reliable to take into the foxhole with you until the smoke clears.