Friday, September 14, 2012

Michigan Multi Family Update 1Q12

 2012 Payroll Trends and Forecast

The impact of the Big 3 recovery began to level off in the first quarter and the Motor City’s payroll job trends slowed down accordingly. Following 2011’s 11-year high 38,200-job performance and 4Q11’s 32,500-job year-on-year advance, the annual job creation run rate lowed to 24,100 (1.4%) jobs in 1Q12, the smallest quarterly year-on-year gain posted since the summer 2010. Seasonally-adjusted figures were consistent, showing a net loss of -3,600 jobs in 1Q12 after a robust 17,500-job add during the prior quarter.

The auto industry continued to make a significant contribution to metro job creation, growing at a 12,000-job annual rate, down only 600 jobs from 4Q11. But it stopped accelerating, allowing slowdowns in other sectors — business and hospitality services and government in particular — to drag down overall employment growth.

2012 Absorption and Vacancy Rates

Detroit apartment properties tenanted at an 11-year high net of 3,115 vacant units in 2011 and got the new year off on the right foot with a 748-unit net absorption performance. The 1Q12 metric exceeded
both the year earlier period (552 units) and the previous quarter (636) and approached the 744-unit 13-year first quarter record. Against no supply, occupancy improved 30 basis points sequentially and 150 bps year-on-year to 94.9%, The Downriver and Novi/Livonia submarkets attracted nearly 250 net new tenants, boosting occupancy 90 and 60 bps, respectively. Ann Arbor also experienced robust demand as nearly 100 units were absorbed, sending the submarket ccupancy average to 97.4%.

By contrast, Dearborn and Midtown Detroit struggled, losing combined more than -100 tenants, and adding 50 and 70 bps to average occupancy, respectively.

First Quarter Rent Trends

Average asking rent trends were seasonally-soft, rising $3 (0.3%) sequentially to $846. But concessions costs plunged -5%, allowing effective rents to surge $6 (0.7%) to $786, representing the second fastest first quarter growth rate recorded in Reis’s 13-year quarterly data history. Measured on a year-over-year basis, metro rents rose 2.6%, the fastest metric observed since late 2007. Only two submarkets failed to notch a sequential quarter advance: Dearborn (unchanged) and Farmington Hills (-0.2%). By contrast, six metro submarkets chalked down 1% or faster growth, led by Downtown, where rents rose $17 (2.0%); Macomb Co. (1.2%); Oak Park and Ann Arbor (1.1%).

First Quarter  Property Markets and Total Returns

At least 12 properties exchanged hands during the first quarter for a total of $139.9 million. This compares to five transactions totaling $59.5 million during the fourth quarter 2011 and three trades for $19.4 million in the year earlier period. The average price of a unit sold was $37,022, up from $23,462 during the prior quarter.

A two-property portfolio trade accounted for more than 60% of first quarter sale proceeds. Both assets are located in Ann Arbor. Prices for these class B+/A- assets were well above the $34,400 2011—2012 average, trading at $88,000 and $114,000 per unit prices, respectively.

Quality assets traded at cap rates above 7%. Indeed, each of the three class-B+/A quality Ann Arbor properties acquired during 1Q12 yielded 7.4% or more by our estimate despite the submarket’s exceptionally tight 2.6% vacancy rate.

Interest rates on quality multi family loans are below 3% levels on fixed rate deals.1

1 The source for this information is Reis, Inc, RCR Forecast and Leeanau Capital

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