SPECIAL FOCUS: AFT’s Top 50
Apartment Markets
APARTMENT FINANCE TODAY • OCTOBER 2007
Digging for Diamonds
BY DANA
ENFINGER
The editors at APARTMENT FINANCE TODAY could
have collected a handful of reports from a
number of research firms and written profiles
on the markets those firms determined were
the strongest performers.
But there was a problem with that. What about smaller multifamily markets
like Allentown, Pa.; Santa Fe, N.M.;
or Medford, Ore.? Trying to find data
for those markets takes some digging.
And that’s what we wanted to do—to
provide you with as comprehensive a
picture as possible.
The methodology
In consultation with economists and
research analysts, we came up with an
exclusive methodology that accounted
for some of the most important factors
that shape multifamily markets: demand
(job growth, home affordability), supply
(inventory growth), and the current
market dynamics (rent growth, vacancy
rate). For job growth, vacancy rate, and
rent growth, we collected the most
recent data at press time—second quarter,
year-over-year numbers. To figure
inventory growth, we mined the number
of existing multifamily units at the time
of the 2000 Census to provide a baseline.
We then collected the number of multifamily
units permitted for each market
at the end of 2006. From there, we calculated
the annual inventory growth.
We also calculated home affordability
for each of the 83 markets we evaluated
by looking up the median family
income for each market and plugging
that into the National Association for
Realtors’ formula to come up with a
home affordability index (HAI) score.
We assumed a monthly mortgage rate of
6.55 percent. The HAI is a ratio of an
area’s median family income to the
income needed to purchase and finance
the area’s median-priced home. An
index score of 100 means that a family
earning the median income has just
enough buying power to purchase a
median-priced home. The higher the
score, the more expensive a home a
median income family can afford. A
lower score indicates that a higher
income is needed to purchase a median-priced
home.
Each market was ranked and scored
based on each of the five market drivers.
The lower the vacancy rate in a market,
for example, the more points it earned.
(Any markets that recorded the same
numbers received the same amount of
points.) Then the five scores were combined,
giving us our final ranking.
This approach helped to prevent
cities with outliers in just one category
from rising to the top. Have a look at
Fort Lauderdale, Fla. It’s ranked No. 46.
Surprisingly, Buffalo, N.Y., fared better.
Although Fort Lauderdale is the eighthmost
expensive home market in our
pool, the fact that the market has witnessed
a lot of inventory growth and
taken a hit in rent growth bumps it
down a few notches.
Before you head off to build your fortune
in Buffalo, though, there’s a lot to
think about. Many factors like the mortgage
crisis are still playing themselves
out. It’s hard to say at this point how the
credit crunch will affect multifamily
investors. Everyone is wary.
“The motto right now seems to be,
‘Trust no one,’” said Linda Barden, senior
associate with the multifamily division
of Colliers International’s private
capital advisors group. “Sellers are afraid
to list properties, afraid they won’t be
able to sell. Potential buyers don’t have
much confidence in the market. It’s not
all doom and gloom, though. The housing
market decline is creating an overflow
of renters in many markets.”
Another factor that is still playing out
is the shadow market created by all those
condo deals gone wrong. Those units
that have yet to revert to rentals may
influence more markets than just Miami,
said Sam Chandan, chief economist with
Reis, Inc., a New York City-based real
estate research firm. So keep in mind that
we treated the condo market as shadows
in our research. It was just impossible to
find out how many condos in 83 markets
across the country reverted to rentals.
The west wing
One thing we noticed, though, was
that the West seemed to be the best.
That is, nine California markets placed
in our top 20. You’ll find only one Texas
market in the top 20. And then there are
Boulder, Colo.; Reno, Nev.; and Tucson,
Ariz. They all made the top 20. The San
Francisco Bay Area, San Jose, and
Orange County, Calif., all have home values
approaching Saturn’s moons. Those
expensive California cities snapped up
the points in that category. But there are
elements other than numbers affecting
the multifamily climate, as you’ll see in
the market profiles. Hopefully, in our
list you’ll find your diamond in the
rough.
TOP 50 MARKETS (PDF)
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