Economy, Real Estate, Multifamily

U.S. apartment fundamentals remain quite strong, with effective rent growth in 2006 exceeding inflation for the first time since 2001. The availability and cost of debt has changed, but healthy occupancy levels, rent growth and a lack of overbuilding are the basis for an optimistic view of the sector.

Apartments consistently outperform all other real estate asset classes in terms of risk-adjusted returns. In fact, over the past three decades, this sector has earned a very attractive 11.91 percent annual total return, compared to 9.62 percent for other real estate property classes – and continued population growth combined with an increasingly unequal distribution of wealth will generate sizable increases in households that are renters by necessity.

U.S. Total Returns

Source: National Council of Real Estate Investment Fiduciaries

In 2007, the investment appeal of the U.S. multifamily apartment sector was diminished due to overpricing concerns and perceived ties to the housing market downturn. Although this sector is unlikely to deliver leading returns in the coming year, the health of fundamentals and expectations for strong, mid-term performance warrant a positive sector outlook.

Favourable demographic shifts are providing further strength to apartment demand. The below 34 age group (or primary renter age bracket) is growing faster than the overall population. Echo boomers, or children of the baby boomers, are included in this age group and are a primary contributor to its growth.

Over the next eight years, about one million immigrants are forecast to enter the U.S. annually; and Arizona, Texas and Nevada are among the states where foreign born residents compose more than 15 percent of state population.

The immigrant population represents another important apartment demand driver. Further, Moody’s Economy.com estimates that it takes approximately 10 years for a typical immigrant household to purchase a home in the U.S. and in the years leading up to this, growth in immigrant households form a significant positive demand driver for rentals.

Property acquisitions of the Fund will focus on Sunbelt regions in southwestern areas of the U.S. This growth trend is expected to continue, creating additional demand for multifamily apartment properties.

These same three states account for approximately 27 percent of the nation’s population growth from 2004 to 2006 and have a relatively high concentration of subprime mortgages. The Fund believes this will result in opportunistic valuations being obtained on purchased properties.

These markets have also been selected because they appeal to the recreation/retirement community, which is one of the strongest buying segments in the market that brings the potential for a quicker market turnaround. The surge in retiring baby boomers and second home buyers has also helped to fuel population increases and job growth in recent decades.

In summary, the foremost advantages of the multifamily apartment property sector includes retracting homeownership, a growing renter population, tightening lending standards, rising single-family home foreclosures, inflated housing costs, favourable demographics and limited capital investment.