Demand For Apartments
Demand for apartments will rise further as the job market recovers and the children of baby boomers move away from home and seek apartments, Ron Johnsey, president of Axiometrics, says in an interview. Supply is tight, with monthly starts of multifamily properties averaging an annualized 112,000 units in 2010, compared with 280,000 units in 2008, according to the Commerce Department.

"The multifamily sector is probably the only commercial real estate sector that has very positive fundamentals behind it," says Jeffrey Baker, New York-based managing director at Savills LLC, a real estate investment bank that raises capital for multifamily owners and developers. "You've got a demographic that is producing more households that want to rent an apartment. You've got virtually no new supply that's been added over the last several years."

Household Formation
The homeownership rate may decline to 65% by 2015 from 66.5% in the fourth quarter of last year, creating 4.5 million new renter households, according to a March 2 report by Green Street Advisors Inc. About 2 million of those households may end up in professionally managed apartments, the Newport Beach, Calif.-based real estate research company says.

Equity Residential, the largest publicly traded apartment owner in the U.S., plans to make about $1 billion in property acquisitions this year, Chief Executive Officer David Neithercut said on a February 3 earnings conference call. The Chicago-based company will seek assets with "a little bit more risk," as the competition to buy safer properties has intensified and driven up prices.

Capital Chasing Deals
The company, which acquired three prime Manhattan high-rises in the beginning of 2010 from developer William Macklowe, turned at the end of the year to properties such as Northpark Apartments in Burlingame, Calif., a 40-year-old garden-apartment community of 510 units near San Francisco International Airport.

"I am not suggesting that we will never buy or won't buy a stabilized asset, but there is an awful lot of capital chasing those," Neithercut said on the February call. The capitalization rate, a measure of investment yield, has sunk to as low as 4% for the newest, fully leased properties in the coastal markets where Equity Residential operates, he said.

Cap rates are a property's net income divided by the purchase price.

AvalonBay Communities Inc., the No. 2 U.S. apartment owner, will increase the concentration of "B assets" in its portfolio to 25% from 15%. The move isn't related to the growing competition for multifamily properties, CEO Bryce Blair says in an interview. Rather, the company's research showed that class A and class B assets perform similarly in the long run. For that reason, AvalonBay, based in Alexandria, Va., is seeking to diversify its portfolio with properties at a variety of prices, he says.

Marina del Rey
"Conventional wisdom is that the 'A' asset on Central Park is always going to outperform the 'B' asset in Central Queens-well, that's not necessarily true," Blair says. "If you've overpaid for an asset on Central Park or are in an area with an oversupply of other 'A' assets, and you have a very unique property in Central Queens, the Queens property may outperform the Central Park property."

At AvalonBay's class B and C properties in the Los Angeles submarket of Marina del Rey, effective rents had an annual growth rate of 4.3% in the ten years through 2009, compared with 2.2% for its class A properties there, according to a November investor presentation on the company's Web site.