The United States housing market is attracting high levels of interest from Australian investors, with the strong dollar and lacklustre market conditions presenting good buying opportunities.
Additionally, with profound changes in the nation’s demographics and attitudes towards home ownership, the apartment market, in particular, is promising investors strong returns.
However, this is a market that has in the past brought many investors undone, so what market conditions impact on US apartment markets and what are the best ways to take advantage of the current opportunities?
Marcus & Millichap senior vice president and managing director Hessam Nadji recently provided Equiti Capital’s clients with an overview of the US apartment market.
Marcus & Millichap is a US commercial real estate investment services firm and Nadji directs the firm’s national multi-housing group, which consists of more than 450 apartment investment specialists in offices across the country.
US employment and home-ownership psychology
The current economic climate is putting the US apartment rental market in a very favourable position and this is largely due to jobs growth.
“Despite going from severe job losses to average growth at best, 6 million jobs will be added between 2010 and 2012, which covers the bulk of the 8.5 million jobs that were eliminated during the downturn,” Nadji said.
“This is very good news for demand in commercial real estate and apartments in particular. Even with moderate job growth we are experiencing record demand for apartments.
“Net absorption has been stronger over the last 12 to 18 months, creating tremendous recovery and vacancies in many markets.”
Is growth in demand for apartments sustainable?
The theory that the US did not need jobs growth to create apartment demand might be true temporarily, but even when apartment demand had outpaced jobs growth, jobs still mattered, Nadji said.
The vast majority of the jobs that have been created in the past 12 months have gone to the 20-34 age bracket; this speaks to the fact the created jobs are fostering renter household formation.
On top of that, 3 million young adults have moved in with family since 2005. The jobs going to that age group are fostering the return of these people back into the rental housing market.
“Job growth causes pent-up demand from young adults living at home, and combined with more people coming back into the rental pool with a change in the psychology of home buying, it creates the bulk of the strength we are seeing in apartment rental demand,” Nadji said.
Trends and strategies
Nadji said US apartment sales activity was trailing by 12 months as of the second quarter.
Trends from a peak of around US$120 billion in 2006 and 2007 dropped to a low of US$23 billion in 2009, leading to a virtual shutdown of the market.
Then in 2010 there was a strong recovery of US$245 billion, which Marcus & Millichap forecast would result in a normalised market of around US$90 billion.
Nadji said the market would continue to strengthen due to the capital that had come back into it and the increase in financing and options becoming more readily available.
Average apartment prices declined by 27 per cent at the bottom of the market and have since recouped to about 13 per cent on average. This means that from its peak, the market is down by 12 per cent to 16 per cent.
Multi-family opportunities for Australian investors
Through our analysis of US property markets, Equiti Capital has identified multi-family apartments as currently the most attractive market for investment.
Multi-family housing is a property made of up multiple apartments, all owned by one business or by individuals. Apartment numbers can range from 50 to more than 1000 in the one asset pool.
Multi-family housing is an institutional-grade asset class, with the largest three listed real estate investment trusts (REIT) holding more than US$21 billion in assets – the largest being the Equity REIT with over $10 billion in assets under management.
The assets are managed with advanced systems and processes to achieve strong income returns.
US and European pension funds have long invested in the sector, with many reports currently suggesting this asset class represents one of the strongest investment opportunities in the US.
For Australian investors, the current opportunity is not just in relation to the currency play, but also the strong buying opportunity created by the financial crisis of the past few years.
There are a large number of bank-owned properties that will come to the market in the next 12 to 18 months, providing excellent value. We feel the asset class provides the best risk/return profile with tremendous upside potential.
