VOL. 124 | NO. 36 | Monday, February 23, 2009
Memphis Multifamily Experiences Mixed Results
By Eric Smith
FINAL SALE: The Shelby Pines Apartment Homes, formerly known as Casa Guadalupe, was the last arms-length multifamily sale in Memphis for 2008 among properties with 100 or more units. It sold in August for $1.2 million. -- PHOTO BY ERIC SMITH
The Memphis multifamily market is garnering mixed reviews as analysts reflect on a relatively stable 2008 while projecting a potentially turbulent 2009.
Though the apartment sector didn’t fare as poorly as office and retail last year, it did endure a host of downward trends, from occupancy to construction to absorption, according to year-end data from the multifamily division of CB Richard Ellis Memphis.
Apartment occupancy in Memphis for 2008 was 89.5 percent, down 0.6 percent from 2007. And rental rates last year averaged $709, a 1.6 percent increase from a year ago.
Blake Pera, senior vice president for CBRE, said the steadiness of those two statistics, despite the slight decline in occupancy, was indicative of the city’s diverse employment base, minimizing job loss to some degree and helping keep residents in their apartments.
“We have often said that Memphis is a market that generally will not see extreme job creation or loss during economic cycles, and I believe we have been able to withstand the recession longer than other markets,” Pera said. “Today, practically every market has been impacted to some degree. Although occupancy in Memphis declined last quarter, overall occupancy is still at a respectable level.”
A place to call home
Mark Fogelman, president of Fogelman Management Group, also said that as far as commercial real estate is concerned, multifamily didn’t end 2008 as battered as other sectors.
“Overall, multifamily does not have the volatility that other real estate sectors have, primarily because even in tough economic times, people need a place to live,” Fogelman said. “Additionally, each property is divided up into potentially hundreds of individual leases, which spreads the risk, as opposed to an office building or a shopping center where a single tenant may represent 25 percent of the overall project.”
Not all multifamily categories escaped 2008 unscathed. The Memphis market saw a negative absorption of 143 units last year. Also, construction was down 250 units in 2008, with just 1,236 apartment units delivered in the area.
And investment sales all but dried up as the year tapered off, with no arms-length sales in the fourth quarter. All 1,564 units that traded hands in Q4 were the result of bank sales, as foreclosures and bankruptcies continued to dominate the transactional landscape while also confounding this year’s reappraisal process.
“Transactions are certainly off compared to the highs experienced between 2005 and 2007,” Pera said. “Most sellers are focusing on operations at this time, unless circumstances dictate otherwise. Deal flow is expected to pick up later in the year – if jobs come back to the market – creating an increased demand for housing.”
At last week’s Commercial Property Forecast Summit, attendees heard Michael Greenberg, CEO of Makowsky Ringel Greenberg LLC, discuss some disturbing trends for the multifamily industry.
While the population and household formations are growing slowly, he noted, the prime renter population (ages 24-30) is expected to decline 0.17 percent a year in Memphis. Also, unemployment is up 2.1 percent from 2007 to 2008 and should continue to escalate.
The most troubling concept, however, remains what Greenberg calls the “shadow rental” category. That’s the segment of the population that isn’t being tracked because they don’t own a home and aren’t renting from a professional management company.
These residents – perhaps victims of foreclosure – appear to be renting from investors who don’t require background and credit checks. And it’s become what Greenberg calls a “material factor” for the multifamily industry, which many thought might benefit greatly from the housing crisis as people could potentially flock to apartments.
“People will say to me, ‘With all these people losing their houses, apartment business must be great.’ Not true,” Greenberg said. “We don’t really know where those people have gone. My theory is that the shadow market is probably a lot bigger than it has historically been as a percentage, and that a lot of those people have gone into that marketplace.”
‘Move people around’
As for specific submarkets, there were some surprising declines in places like Germantown and Collierville. But, Fogelman noted, properties along the Poplar corridor – “Anything between Poplar and Walnut Grove, from Midtown to Collierville” – should be all right.
Elsewhere in the market, however, especially in places like Cordova, there is a danger of continued decline in occupancy.
“The market is struggling,” Fogelman said. “The hardest-hit submarkets have been Cordova, Southeast Memphis and Southaven. We’ve seen several properties drop between 5 and 7 percent in occupancy over the past 120 days, and we’re seeing major price drops.”
Most analysts agree that tightening credit and the inability to obtain financing will keep transactions low in 2009. And the shadow market should continue to be a factor this year as the city’s inability to create net jobs will hamper its ability to see multifamily growth.
“I think Memphis is a weaker performing apartment market than other apartment markets,” Greenberg said. “The prospects in Memphis aren’t so great. One of the points I make when you look at pure demographics … Memphis is not really growing. If it’s growing, then you’ve got something to talk about. But we don’t grow, we just move people around.”