Apartment building values in the U.S. are soaring as millions of families switch from being homeowners to apartment renters. Falling home prices in many major markets and crawling sales are behind the renting revolution.
"Investor demand is so intense, prices of some properties are approaching values last seen in mid-2007," reports The Wall Street Journal.
Benefits from rising apartment-building values are rippling beyond their owners.
"It's a boon for banks and other lenders holding billions of dollars of debt on apartment buildings and other commercial real estate that had been under financial stress," the WSJ states.
Values of apartment buildings rose 16% in 2010, according to the Encino, CA-based brokerage firm Marcus & Millichap, after falling 27% between 2006 and 2009.
Values of apartment buildings owned by real-estate investment trusts are now within 10% of their 2007 peak, according to Green Street Advisors, a research firm that follows REITs.
According to the WSJ, resurgent apartment values were first seen in late 2009 in markets such as New York City and Washington, D.C., where the economy has held up better and recoveries have been quicker. But the price surge has now spread to other markets including Los Angeles, Seattle, Boston, Baltimore and Austin, Texas.
Investors in some markets have begun to quickly resell or "flip" properties, a practice not seen since the boom years.
Last month, for example, TIAA-CREF paid $62 million for the 261-unit Newbury Commons in Stamford, Conn. The purchase price was 65% above what Seaboard Properties paid in February 2009, according to Real Capital Analytics.
The WSJ reports apartment-building values are being propelled partly by low interest rates that have made borrowing less expensive and competing investments like the bond market less attractive.
Values of office buildings, stores, warehouses and other types of commercial real estate are also rising in some markets for the same reason.
But the apartment market is the healthiest, partly because financing is cheaper. Mortgage giants Fannie Mae and Freddie Mac buy apartment-building loans originated by others as part of their mission to support the housing market, but they don't buy loans for other commercial property.
Apartment values also are getting boosted by powerful supply-and-demand forces, analysts tell the WSJ.
Renter households now top a record 37 million after increasing more than 3.5 million in the past five years, partly due to the foreclosure crisis. Green Street Advisors expects an additional 4.4 million rental households to be added by 2015.
The latest national data show that the slump in housing sales is far from over. The Case-Shiller Home Price Index posted a 0.5% drop in November on a seasonally adjusted basis.
The Commerce Department reports only 321,000 homes were sold in all of 2010, the lowest tally in records dating back to 1963.
The nation's home-ownership rate is also falling, to 67% of U.S. households in 2010, after topping 69% in 2004, according to the Census Bureau, with further declines expected. Each 1% decline represents one million households moving to rentals, housing experts say.
Meantime, new supply of apartment buildings is at its lowest level in two decades because the financing spigot turned off when the recession hit.
Apartment completions will total 53,000 this year, half of what was delivered in 2010, according to Marcus & Millichap, and down from 120,000 in the peak year of 2009.
Not all apartment markets are booming. Houston, Jacksonville, Fla., and Memphis, Tenn., had fourth-quarter vacancy rates topping 10%.
But in other markets, some see a risk of overheating, according to the WSJ. Since low interest rates are partly propelling the rise in value, rate increases could take some steam out of the market. And landlords won't be able to keep raising rents at current rates if job growth doesn't pick up.
For now, however, "market forces are expected to keep pushing rents higher," according to the WSJ.
Green Street expects every major metro market to see rent growth between 3% and 10% this year, with the biggest gains in San Jose, Calif., San Francisco and New York City.