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Subprime crisis a boon for apartment owners: Fewer renters are fleeing to single-family homes

September 24, 2007

Many of the banners touting free rent and other promotions have disappeared from Indianapolis-area apartment complexes.

The concessions no longer are necessary as more Hoosiers look to rent, and they stay in apartments longer. Market observers say a big reason for the uptick is the subprime housing crisis and a resulting slowdown in new-home construction.

"People are staying longer because it's a little more difficult to purchase a home," said Alexandra Jackiw, president of Buckingham Management LLC, a subsidiary of locally based Buckingham Cos., which owns a 12,000-unit apartment portfolio in the Midwest. "People are thinking twice about getting into that housing market. We're also seeing people come back into the rent market because of foreclosures."

Last year, resident turnover for Buckingham's properties ranged from 55 percent to 58 percent. This year, the company has seen the turnover rate dip below 50 percent in some areas. The average stay for residents also has risen, from about 16 months to 18 months. Several residents who gave moveout notices have changed their minds.

Over the next year or so, turmoil in the single-family housing market should continue to help strengthen multifamily, allowing owners to raise rents faster than before, said John Sebree, senior investment associate in the local office of Marcus & Millichap.

Subprime loans dramatically increased the number of people who could buy a home, but as credit requirements have tightened, more people are forced to rent. Meanwhile, problems in the credit markets spurred by the subprime fiasco could slow the construction of apartment units, putting even more upward pressure on rents.

"At the same time, the population of the city of Indianapolis and the job base continue to grow," Sebree said. "What will happen is, occupancy rates for Indianapolis apartment properties should continue to increase, up to 94, 95, 96 percent. Once that happens, owners will be able to start increasing rents."

Sebree is projecting 3-percent rent growth for 2007 and up to 3.5-percent rent growth in 2008 and 2009. The average over the last five years has been 1.5 percent per year.

He also expects occupancy rates-already high-to edge up even more. For 2006, Sebree data shows Indianapolis apartments were 92.3-percent occupied.

As rents increase, investors-particularly those outside the state-will find multifamily properties more attractive, Sebree said. Over the last three years, 80 percent of sales over 100 units were snapped up by out-of-state investors.

Still, the outlook isn't all rosy for apartment owners. Depending on how the property tax crisis shakes out, multifamily could get hit hard.

And while demand is strong in parts of the Indianapolis area, it's soft in others. Carmel and Fishers are booming, for example, but the south side still is a tough sell.

The credit profile for apartment-dwellers also has declined, a problem exacerbated by the subprime meltdown, said George Tikijian, owner of the locally based apartment brokerage Tikijian Associates.

"There are a lot of folks that are stressed economically, a lot of people with poor credit trying to rent," Tikijian said. "That's bad for apartments."

Some apartment managers-including Buckingham, which owns about 6,000 apartments in the Indianapolis area-have had to adjust their requirements for accepting tenants. Buckingham isn't immediately excluding people based on a foreclosure, Jackiw said. If the balance of an applicant's credit is in good shape, and he's held down a job, he can get an apartment.

"You've got to change when the market changes," Jackiw said. "Regardless of what the issue is, they need a place to live."

That's mostly good news for multifamily. Already, owners have seen a pop in occupancy, but more strengthening is on the way, said Steve LaMotte, senior vice president for multifamily at CB Richard Ellis.

"All it affects is the demand side. If you've got more folks squeezed out of single-family, they're either doubling up in existing housing units or renting," LaMotte said. "That's generally what we expect to happen. Under any scenario, it's positive for multifamily."
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