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Ed Padilla

Ed Padilla doesn’t hesitate when asked which of the main commercial real estate sectors is performing the best today:

“Clearly, it’s multi-family,” said Padilla, chief executive officer of Minneapolis-based NorthMarq Capital. “It is the best performing property type by any measure you come up with: vacancy rates, cap rate value, any measure. It is the best performer right now.”

The multi-family sector has actually been the top performer in the commercial real estate market since the industry’s slump began.

Those commercial pros working in this field point to several reasons for multi-family’s continuing strength: People need places to live, no matter how bad the economy is performing. Since the recession began, construction crews haven’t built many new apartment complexes across the country. This has made it easier for owners to fill up the apartment units that already exist.

Some multi-family experts are even predicting that landlords will finally be able to charge higher rents, a move that industry analysts are saying will occur in the next 12 months.

Mike Jehle

“In a downturn, people are more likely to rent,” Padilla said. “They need a place to live. At the same time, apartments have a smaller downside than do some of the other property types. You can see wild swings in hospitality properties. Office properties often experience dramatic swings. Retail, too, isn’t always the most stable of property type. Apartments, though, have proven to be more stable. In a volatile economic environment, there is just more confidence in the multi-family sector.”

Job growth is key

Mike Jehle, Midwest regional director with Uniondale, N.Y.-based Arbor Commercial Mortgage, said that those Midwest cities that are experiencing at least some job growth also boast the strongest multi-family markets.

“Even if an area is experiencing modest job growth, its multi-family market tends to be strong,” Jehle said. “People might move to those areas with the idea of at least taking out a 12-month lease. It gives them a place to live but it also gives them some flexibility. Minneapolis is a great example. The occupancy rates there are very strong. We are seeing good occupancy rates in Chicago, too. And Columbus is doing well, too. Even though Columbus has a large supply of multi-family properties, the city is still strong in this market.”

Not every Midwest market is performing well when it comes to multi-family, though. Jehle points to the state of Michigan, where many of its largest cities feature high multi-family vacancy rates.

The reason for Michigan’s multi-family troubles is obvious: High unemployment rates have hurt the state. With few new jobs, there are few new renters.

“The good news is that everyone needs a place to live,” Jehle said. “During the very worst of the recession, we saw a lot of people doubling up. They were moving back in with their parents. Households were not being formed at the rates we were used to. This is changing again. Now we are seeing an increase in households being formed. That’s helped occupancy levels in the multi-family markets across the Midwest. It’s helped the markets around the country, too.”

Multi-family has benefited, too, from having a steadier stream of financing available to it than have other commercial markets.

“Critical to multi-family maintaining its strength and attractiveness to investors is that Fannie Mae and Freddie Mac continue to be the dominant apartment lenders in the country,” Padilla said. “Without capital, any property type would suffer. On the debt side, Freddie Mac and Fannie Mae fill that requirement completely. Other commercial types do not have that luxury. Once the CMBS market stopped and life insurance companies pulled back, other sectors did not have the luxury that Freddie Mac and Fannie Mae provided to multi-family.”

Future rent increases?

Both Padilla and Jehle said that they expect net effective rents and net operating incomes to increase for owners in the near future.

Padilla said that overall owners have experienced for the last two years a negative trend in net effective rents and net operating incomes when it comes to the multi-family market.

He’s confident, though, that this will soon change.

“This is on a national level so it doesn’t apply to all markets, but as a general trend we are seeing positive improvement in effective rents and net operating incomes,” Padilla said. “There is more confidence out there that there is a brighter future and more upside in multi-family. You are no longer watching a downward trend and wondering where volumes are going. That attracts both equity and debt capital to the property class. Apartments are at the top of the list of property types that are holding their own today.”

Many industry projections are predicting that landlords will be able to secure rent increases of 3 percent to 5 percent in the next 12 months.

Jehle says that such rent increases are more than obtainable.

“I think it is a reasonable prediction,” he said. “With the firmness of the occupancy rates in apartments, landlords should be able to get these rent increases. And that’s great news for owners. For the past 24 months, owners have not seen a lot of rent increases.”

Owners who increase their rents won’t be in as much danger of losing their tenants, either, Jehle said. As an example, he said, owners who would have boosted their monthly rents by $50 from the apartments across the street 18 months ago would have seen a mass flight from their tenants to those cheaper units.

Today, though, tenants will pay the extra $50 as long as the apartment managers listen to their complaints, fix things quickly and make good on their promises.

Owners are fortunate in that they don’t have to compete with much new multi-family construction today. However, they still have to maintain their current units and treat their tenants well to keep renters coming to them, Jehle said.

“Good manages are getting their fair share of the renters who are out there,” Jehle said. “They do have to separate themselves from the other properties that are out there, though. More than anything else, the successful complexes will have management that is willing to listen to the issues that tenants have. They will have management that solves tenant problems before the tenants even bring them up. That’s nothing more than the basic ‘ABC’s of good business. Listen to what your customers want and give it to them. As simple as that formula is, though, if it’s not followed, people will not stay at a property.”


Tags | Arbor Commercial Mortgage, Chicago, Michigan, Minneapolis, Minnesota, multi-family, Nebraska, NorthMarq Capital

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