midwest R E A L FEBRUARY 2011 Randhurst Revitalizing the suburban mall Page 12 E S T A T E N E W S ® VOLUME 27, ISSUE 1 THE DAKOTAS | ILLINOIS | INDIANA | IOWA | KANSAS | KENTUCKY | MICHIGAN | MINNESOTA | MISSOURI | NEBRASKA | OHIO | TENNESSEE | WISCONSIN WWW.REJOURNALS.COM As economic struggles continue, multi-family remains resilient Directories on pages 22 and 23: Multi-Family, Energy Consultants, Business Parks Marcus & Millichap is also predicting that building owners will regain some of their pricing power in 2011. Asking rents will jump 3.5 percent to $1.067 a month in 2011, the company says, while effective rental rates will rise 4.5 percent to $1,002 a month. Marcus & Millichap ranks Minneapolis/St. Paul as the top Midwest market for multi-family, ranking eighth overall across the countr y. Other Midwest markets ranked high by Marcus & Millichap are Louisville, ranked 22nd; Chicago, 23rd; Milwaukee, 25th; Kansas City, 26th; and St. Louis, 29th. Har r y Giallourakis, managing director of Cleveland-based Bellwether Real Estate Capital, said he isn’t surprised at multi-family’s continued stability. “There has been no new constr uction in the Midwest in multi-family of any significance,” he said. “The housing market woes have helped multi-family. In the past, the apar tments market came under stress because of the ease of access to home buying and financing. That’s changed, so people are tur ning toward multi-family.” Giallourakis said that higher-end apar t ment complexes across the Midwest are holding up especially well even as the economy continues to str uggle. Occupancies for these buildings generally hover nor th of 90 percent, he said. Concessions at these buildings continued on page 23 Village Green’s Mill District City Apartments in Minneapolis. by Dan Rafter, Editor Stable. That’s the word that Patrick McNulty uses to describe the multi-family market across the Midwest. And today, “stable” really is the best anyone can hope for when it comes to commercial real estate. McNulty, a director in the Chicago office of Uniondale, N.Y.-based Arbor Commercial Mor tgage, said that the multi-family sector remains strong in most Midwest markets, outper forming retail, industrial and office as 2011 begins. “When a bad economy hits, the office and retail sectors take a direct hit,” McNulty said. “Vacancies rise quickly. There are lay-offs. Stores close. With multi-family, the hit from a bad economy is indirect. People lose homes in a bad economy. But they have to live somewhere. They turn to apar tments. That helps keep this sector strong.” McNulty is far from alone in this assessment. Commer cial real estate professionals across the Midwest agree that multi-family remains the strongest of the industr y’s market segments. Higher rents coming? Landlords and building owners want to know one thing: When can they star t raising rents again? And when they can star t cutting back on the concessions they’ve made to entice renters to their buildings? Charles Meyer, managing director of Columbus, Ohio-based Red Mor tgage Capital, said that these days may be coming sooner rather than later. As the economy shows some signs of life, apar tment-building owners will be able to demand more from their renters, Meyer said, within reason. “The ability to pull rents up is coming,” Meyer said. “It’s not here yet, but as jobs begin to get created again, as the employment pi c t u r e i m pr o ve s , w e w i ll s e e t h i s h appe n . A n d y o u ’r e alr e ady seeing many of the concessions disappearing.” The troubles of the housing market are helping this along. Residential mor tgage lenders, chastened by the criticism they received for their lax lending standards leading up to the Great Recession, have now moved in the opposite direction. Many conventional mor tgage lenders are requiring borrowers to come up with down payments of 20 percent of a home’s purchase price before they’ll approve mor tgage loans. Lenders are placing an even greater emphasis on credit scores, too, sending many credit-challenged borrowers to FHA loans as their only hope to acquire mor tgage financing. The numbers As borrowers struggle to qualify for home loans, a greater num-ber of them are renting. Af ter all, they do have to live somewhere. At the same time, many former homeowners, who have either lost their residences to foreclosure or who walked away from upside-down mor tgages, are viewing renting as the sounder economic decision in today’s challenging economy. At the same time, most Midwest markets haven’t overbuilt when it comes to multi-family proper ties. This has led to solid vacancy rates in most metro areas. According to the 2011 National Apar tment Repor t from Marcus & Millichap Real Estate Investment Ser vices, developers w i ll c o m ple t e 5 3 , 0 0 0 t o t al r e n t al u n i t s ac r o s s t h e c o u n t r y t h i s year. That falls shor t of the number delivered in 2010, by a rather large 46 percent. This new supply of apar tments will again fall shor t of demand. As a rest, Marcus & Millichap is predicting that U.S. apar tment vacancy rates will decrease 110 basis points this year to 5.8 percent.