Apartment Market Strong in 2012, California Transportation Ups and Downs

Real Estate advisory Marcus & Millichap (Calabasas, CA) released its 2012 National Apartment Report yesterday and the findings should be welcome news for architecture, engineering and construction companies that work in the multifamily-for-rent space.

Unlike other real estate markets that boast improving metrics, but are not yet to the point of sparking new construction, apartments are putting the AEC industry to work, says the firm.

“Developers are getting busy, as are lenders and equity investors,” noted Marcus & Millichap in the introduction to its 61-page report. “And, after the brief pause in late 2011, we should see more projects started, steadily boosting additions to supply over the next three years. For the time being, demand will outstrip supply additions by a wide margin, leading to lower vacancy across virtually all markets and the first year of broadening rent growth.”

The report, which you can access for free if you sign up on the research page of the Marcus & Millichap web site (www.marcusmillichap.com), suggests that there is no mystery to the strength of the apartment market, even when one of its main drivers — employment — is generally weak.

“The common perception that apartment renter demand is defying economic fundamentals is understandable but only partially true,” the report reads. “Favorable demographics among prime renters, the release of pent-up demand as young adults debundle from family and roommates and increased renter demand due to falling homeownership certainly drove more renters to apartment communities last year. At the same time, young adults captured a majority of the 1.8 million private-sector jobs created over the past year, which emphasizes the importance of underlying economic performance as a major driver of rental demand. This becomes more important in 2012 and beyond as the white-hot levels of post-recession net absorption cools off to healthy but less-spectacular levels.”

Strength in the apartment sector is a major theme of The AEC Market Guide to California, our own 340-page research report on all the markets in California. In the Guide, we named apartments the top AEC market for 2012, stating: 

“The ride isn’t over for the apartment market…in fact, it may be just beginning if single-family housing continues to lag. Demographics and economics point to a strong 2012 for multifamily-for-rent.” 

We noted in our report, and Marcus & Millichap reinforces in its research, that California is home to several of the top geographic markets in terms of outlook for apartment development. This status actually improved in 2012, as San Jose climbed three spaces to claim the top spot among 44 diverse metropolitan statistical areas (MSAs) ranked in their annual National Apartment Index (NAI), while San Francisco leaped forward five spots to second place.

Orange County (5th) and San Diego (6th) held the same places as last year, as did Oakland (16th). Los Angeles slipped two spots to 13th, while Sacramento plummeted seven spots to 42nd. San Bernardino-Riverside crept up three spots to 29th in the index, which ranks MSAs based on their cumulative weighted-average scores for various indicators, including forecast employment growth, vacancy, construction, housing affordability and rents.

Sacramento’s employment woes are well-documented, with an unemployment rate still hovering around 13%, so the fall in ranking is somewhat understandable. This is largely due to public-sector layoffs in the capital city, but this is not the only reason — major corporations such as Cisco Systems and Bank of America have reduced their workforces in the city as well.

Despite its poor ranking,  Sacramento’s apartment market is showing signs of rebounding. The Sacramento Business Journal, in a June 2011 article, announced “Multifamily Market Heats Up.” The article focused primarily on sales activity among investors, as opposed to new construction, but the message was clear – the market is rebounding due to improving conditions in Sacramento and a more challenging market in the nearby San Francisco Bay Area.

“Wary of the superheated Bay Area market, multifamily housing market investors are flocking to Sacramento. Low prices, the move away from owner-occupied housing and intense competition elsewhere are among the factors driving up interest,” the article said.

Mark Johnson, president of Acclaim Homes (Menlo Park, CA), said, “We like the fundamentals in Sacramento. Obviously, there are foreclosure problems and government layoffs. But…we think Sacramento is going to pick up with job growth in the next 12 months.”

The message, then, is that the rising tide raising all ships in the apartment market hasn’t passed Sacramento by.

Transportation Ups and Downs

If the transit market for AEC firms in California is to live up to the expectations of the 2012 AEC Market Guide to California, where we rated it the sixth-best market for AEC firms among 40 ranked, it may have to do it with the funding scales tipped more toward the federal government than the state.

While federal budget proposals have favored mass transit, the Governor’s proposal slashes $3.7 million and 41.7 positions from the state’s Mass Transportation program. “With the significant reduction of Public Transportation Account funding for capital projects, the Budget proposes a reduction in project oversight positions to appropriate levels,” says the accompanying narrative in the Governor’s proposal.

The job cuts could mean that the state will lean on private consulting firms more, and the Governor continues to support, high-speed rail, so the outlook could be worse.

All in all, the Governor’s budget is favorable to transportation, according to David Ackerman, writing in the AGC’s Monday Morning Quarterback publication. “Governor Brown’s budget released on January 5 proposes a significant structural change for transportation, and guarantees funding availability for current and new projects,” wrote Ackerman.

Consolidation of multiple agencies, including Caltrans, would leave a stand-alone Transportation Agency that “will allow transportation policy to be developed and implemented at the cabinet level,” wrote Ackerman, a principal with lobbying firm The Apex Group (San Francisco, CA).

He also applauds the Governor’s proposal to eliminate the annual “hold” on highway funds under a late budget and to permit Highway Users Tax Account (HUTA) money to flow to maintain contracts and staffing for transportation programs by clarifying language related to borrowing from these funds.

“The budget also continues the state’s commitment to completing Proposition 1B, by proposing $2.8 billion in a combination of earlier appropriated funds and new funds to continue ongoing construction and implementation of projects,” Ackerman concludes.

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