The Top Trends and Markets to Watch in

2013
Markets to Watch Columbus Denver Houston Indianapolis Louisville Nashville Orlando Raleigh and the North Carolina Research Triangle Salt Lake City and the Wasatch Front San Antonio

Apartment
In markets across the country, the apartment sectors rebound from the Great Recession has been a defining trend of the commercial real estate recovery. Six years into the housing downturn, perceptions of homeownership as a risky endeavor are only now beginning to soften. For millions of American families, renting has become the preferred option. For millions more, hurdles in qualifying for a mortgage have made renting the only option. As many households reassess the role homeownership in the American Dream, the bias in favor of renting has fueled occupancy and rent gains unmatched by any other property type. Investors have responded to the sectors strong fundamentals and the favorable risk profile they have engendered. And where buyers in other sectors have struggled with a restrictive credit environment, apartment investors have been aided by low-cost financing through Fannie Mae and Freddie Mac, and by guarantees from the Federal Housing Administration. Where is the opportunity for apartment investors in 2013? In the largest gateway markets, prices have risen at a much faster rate than income, pushing cap rates for the most prominent assets to exceptionally low levels. Attention is shifting to more rewarding investment plays. In secondary markets and for properties below the radar of the largest institutional investors, there may never be a better time to invest.

10 Apartment

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The Top Trends and Markets to Watch in

70 60 50 40 30 20 10 0

2013

A Growing Development Pipeline

Developers have followed close on the heels of investors as apartment property prices have risen above replacement cost. By late 2011, the pipeline of multifamily properties under development had swelled, more than doubling the construction tally from a year earlier. Heading into 2013, rental housing under construction is nearing its pre-recession peak. The impact of new multifamily development has yet to be felt in most markets. But over the next year, the first wave of new properties will come online, tempering the pace of rent growth. Can the market absorb the new inventory? The national tally of apartments under construction masks that many supply-constrained markets and submarkets still have very little development. Investors must keep a close eye on groundbreakings, however. Some of the markets with the greatest momentum have seen their development pipelines accelerate past historic norms. That may present a challenge as rental demand adjusts to the turnaround in single-family housing.

Rental Housing Construction Starts

In Thousands; Through Q3 2012 Source: Commerce/ Census Bureau

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2007 2008 2009 2010 2011 2012

70 60 50 40 30 20 10 0

Rental Housing Completions

In Thousands; Through Q3 2012 Source: Commerce/ Census Bureau

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2007 2008 2009 2010 2011 2012

14%! 12%! 10%! 8%! 6%! 4%! 2%! 0%!

1985! 1990! 1995! 2000! 2005! 2010!

Will a Housing Recovery Hurt the Apartment Sector?

After a litany of false starts, a broad-based recovery in single-family housing is finally taking hold. Home sales volumes and prices are both rising, supported by historically low mortgage financing costs for well-qualified borrowers. As the housing market improves, some renters will inevitably make the shift to homeownership. But the legacy of the housing crisis will survive in larger required down payments and stricter lending standards. The lower homeownership rate means the long-term pool of renters will be many millions of people larger.

Residential Mortgage Rates for ! 30-Year Fixed Rate Mortgages!

Source: Freddie Mac!

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The Top Trends and Markets to Watch in

2013

COLUMBUSOHIO
The Buckeye state is emerging as a model of renewal in the postfinancial crisis era. Weighed down by its dependence on manufacturing, Ohio missed out on the housing boom but was not spared the downturn that followed. The states fortunes are now rising, however, and Ohio consistently ranks as one of the nations best places for doing business. Lifted by a reemerging energy sector and an auto industry supply chain that reaches every corner of the state, Ohios slowly diversifying economy was second only to California in last summers count of new job creation. Leading the turnaround, Columbus boasts the strongest economy in the state, accounting for almost half of its new jobs. Apart from serving as the states seat of government, Columbus is home to the nations thirdlargest university and has thriving education and healthcare sectors. A regional financial center in its own right, it is also JPMorgans second-largest employment center outside of New York City. For investors looking for steady growth and who want to avoid price pressures from large institutional investments, Columbus may offer just the right balance.

MARKETS TO WATCH
NOT THE LARGEST or the most
hotly contested markets, the 2013 Apartment Markets to Watch are each at an important juncture that presents unique opportunities for investment. Together, they reflect the diversity of trends that is driving the economy and commercial real estate performance in markets across the country.

READING THE CHARTS

RENT GROWTH OUTLOOK
How much will market average apartment asking rents grow over the next five years?

INVESTMENT LIQUIDITY
How quickly can I find a buyer for my property? How easily will that borrower obtain financing?

DOMINANT STRATEGY
Are investors buying for operating income or for gains on a future sale? With longer hold periods in less liquid markets, how are investors balancing these two objectives? Is the dominant strategy right for me? Not necessarily. Markets with diverse investor pools including contrarian buyers are often more resilient to unexpected shocks and downturns in the economy. While a dominant strategy may characterize a group of buyers, opportunities for investment are as varied as each markets properties.

COLUMBUS

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The Top Trends and Markets to Watch in

2013

DENVERCOLORADO
A center of innovation, Colorado has nonetheless struggled to rebuild momentum after emerging from the recession. Positioned as one of the countrys new energy economies, investments in the states green industries have seen modest returns as compared to early expectations. Even so, Denvers local economy is a star performer and amongst the most consistent long-term performers. The markets inherent strengths are reflected in migration patterns that will continue to support healthy apartment demand. Young households dominate inmigration from other parts of the country and show no signs of souring on the metro area. Apartment development picked up early in Denver and will soon temper the pace of heady fundamentals gains. More than 2,000 units came online in 2012, a larger number than in either Chicago or Atlanta. Those units were easily absorbed and rent growth and occupancy trends are as strong as any market off the coasts. The upward pressure on property income will ease in 2013 and 2014 as the development pipeline brings new inventory to the metro area. Investors should be careful to price in slower future income growth, even if that means walking away from the most obvious buys.

worlds largest medical district, home to almost 50 unique institutions that together employ more than 70,000 people. In spite of its strong employment growth trends, Houstons apartment fundamentals trail supply-constrained markets like New York and San Francisco. Rent increases are nearly on par with its coastal peers, however, and Houston easily holds a spot in the top 10 markets for apartment income growth. There are roughly 13,000 units in various stages of planning or construction, so investors should be careful of Houstons tendency to overbuild in some submarkets. The strongest plays in 2013 may be for Class B apartments in land- and supply-constrained neighborhoods. As rents for the best units have climbed beyond the means of some younger households, lower tiers of the market have registered bigger improvements in occupancy.

HOUSTONTEXAS
The energy sector is not the only reason for Houstons impressive rebound from the recession and financial crisis. The drivers of growth are varied. Only New York and Chicago can boast a larger number of Fortune 500 companies. Apart from its mainstay industry, Houstons employment base benefits from a diversity of anchors, including the Port of Houston and the Texas Medical Center. The latter is the

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The Top Trends and Markets to Watch in

2013

INDIANAPOLISINDIANA
Improving fundamentals and higher yields make for attractive investment options in the Indianapolis metro area. The economy is growing and, along with it, apartment demand. Urban lifestyle developments and properties in their immediate vicinity are registering the strongest absorption, triggering a significant increase in the local development pipeline. Among recently announced projects, a fire station at the gateway to the citys arts district will be replaced by a $43 million mixed-use complex including more than 200 apartments and electronic signage worthy of New Yorks Times Square. Like the rest of the Hoosier State, Indianapolis population is aging. With baby boomers progressing towards retirement, Indianas over 65-population will grow by more than 70 percent over the next two decades. The metro

area captures the lions share of the states population growth across all age groups. Between 2000 and 2010, Indianapolis added more than 230,000 people to its census, accounting for almost 60 percent of the states population gain. Unless development gets further ahead of itself, properties that are well matched to Indianapolis particular demographic trends will set the bar for sustained income growth in the Midwest.

LOUISVILLEKENTUCKY
Ranked the most livable city in America by the US Conference of Mayors, Louisville is riding the crest of the auto sector recovery. Fords decision to expand its Louisville Assembly Plant has proven one of the countrys best examples of state and local government partnership with private industry. That businessfriendly environment is helping to Demand for apartments is strong enough that Louisville now has one of the lowest vacancy rates in the country. Outside the range of the institutional investment radar, prices in the metro offer more upside than other markets with comparable fundamentals.

foster employment growth across other industries in the metro area, as well. Direct and indirect job creation from the Ford plants expansion, first announced in December 2010, has added to a recovery also supported by growth in the health care, insurance, and education sectors.

LOUISVILLE

2012 Sperry Van Ness International Corporation. All Rights Reserved. SVN, SPERRY VAN NESS, and the SPERRY VAN NESS COMMERCIAL REAL ESTATE ADVISORS logo are registered service marks of Sperry Van Ness International Corporation. All Sperry Van Ness offices are independently owned and operated. This is not an offering. A franchise offering can only be made through a Franchise Disclosure Document.

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The Top Trends and Markets to Watch in

One of the nations fastest growing metro areas, employment in Nashville has more than recovered from its prerecession peak. Forbes ranked the market third in its most recent tally of Next Big Boom Towns. And with good reason; population and income growth have catapulted Nashville from an economic laggard to its current position near the head of the pack. The drivers of growth are varied, running the gamut from healthcare to auto manufacturing. Michigans historic monopoly on auto production has not deterred Nissans investment in the Nashville metro area. The

2013

NASHVILLE TENNESSEE

addition of a third shift at its Smyrna plant, announced in mid-year 2012, is part of Nissans strategy to build most of the cars destined for US consumers in North America itself. Tennessees supportive environment for business, which includes job-training grants, has been a driver of the regions improving economy. Taking advantage of the states Fast Track program, health system operator HCA will receive $7,500 for each of the 1,000 new jobs it plans to bring to midtown Nashville. HCAs commitment triggers the development of two new office towers. The West End Summit will add almost 1 million square feet to the citys office inventory, driving demand for nearby housing. As in other markets, investors should keep an eye on the construction pipeline. Development within the Interstate-440 Loop has accelerated over the last year and could slow the pace of income growth.

ORLANDOFLORIDA
If long-term demographics trump short-term challenges, patient investors in Orlandos apartment market will be well rewarded. Like other parts of the Sunshine State, Orlando struggled through the housing downturn. But returns to steady job growth and diversification into the tech sector have seen Orlando recover faster than many of its peers. Florida will surpass New York as the third most populous state in the Union by the end of 2013, behind only Texas and California. Backed by job growth, Orlando will attract a disproportionate share of those new Floridians. For the time being, Orlandos apartment fundamentals lag the markets that sit atop investor rankings. That is unlikely to remain the case. A faster pace of hiring in the hospitality sector will support demand for Class B space. Higher up the property
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ORLANDO

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The Top Trends and Markets to Watch in

Continued From Previous Page

2013

ladder, a meaningful recovery in the single-family markets of the Northeast and Midwest opens the door for southbound migration patterns that have been disrupted by the housing crisis.

Downtown Orlando will be a primary beneficiary of new arrivals attracted to its growing base of amenities. businesses based in Raleigh alone. A supportive business environment, highly educated workforce, and updated master plans position the Research Triangles anchor cities for sustained growth, albeit at higher vacancy rates than along the coast. Raleigh in particular offers a longterm income play as long as investors steer clear of the bidding contests that have characterized some recent deals. Raleigh may also offer some cover for investors hedging against the impact of a recovering housing market. Demand for rentals is holding up even as the area boasts one of the healthiest single-family markets in the nation.

RESEARCHTRIANGLE NORTHCAROLINA
Home to an exceptional array of research universities, new economy businesses, and tech startups, the success of North Carolinas Research Triangle has spawned imitators around the globe since its inception in 1959. Bounded by Raleigh, Durham, and Chapel Hill, the Research Triangle is stepping up to the challenge presented by more urbanized tech centers in Austin, Seattle, and New York. In the five-year period from 2006 to 2010, almost 5,000 patents were filed by

RALEIGH

2012 Sperry Van Ness International Corporation. All Rights Reserved. SVN, SPERRY VAN NESS, and the SPERRY VAN NESS COMMERCIAL REAL ESTATE ADVISORS logo are registered service marks of Sperry Van Ness International Corporation. All Sperry Van Ness offices are independently owned and operated. This is not an offering. A franchise offering can only be made through a Franchise Disclosure Document.

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The Top Trends and Markets to Watch in

2013

SALTLAKECITYUTAH
Consistently ranked among the best places to work and do business, Salt Lake City boasts one of the lowest unemployment rates of any major city in the country. Job creation is outpacing national trends, with the metro areas biggest increases coming in high-wage occupations in professional and financial services, as well as high tech. As of late 2012, the metro area had fully recovered the jobs lost during the recession. No wonder Zions Banks Consumer Attitude

Index shows increasing confidence about the health of the regional economy. That confidence is captured in Salt Lakes occasional break with tradition. The citys stepping into its own was underscored by the Tribunes endorsement of President Obama over his rival for the White House in late 2012. Working in favor of apartment demand, the metro areas growing population is weighted to

relatively younger households. The states median age is 27, compared to 35 in the national statistics. This combination of young households and an increasing number of amenities in Salt Lake Citys downtown have lifted income performance for buildings near the core. The metro areas vacancy rate is barely above 4 percent; the resulting rent growth has motivated a construction pipeline that will temper rent gains somewhat in 2013.

The Alamo Citys steadily rising occupancy and rental rates have not gone unnoticed by mid-cap investors who might otherwise compete with larger institutional buyers in the Texas job engines other major centers. Before the financial crisis, those same investors may have passed on San Antonio because fundamentals did not develop the momentum seen elsewhere.

The markets stable trends and easier pricing terms are now seen in a more favorable light. For investors concerned about overbuilding, San Antonios development pipeline has been well absorbed thus far. The metro areas vacancy rate has been cut in half since 2009, falling below 5 percent in 2012 even as 4,000 new units came online.

SANANTONIO TEXAS
New investors to the market may have to act fast. A recent influx of outside capital has pushed multifamily pricing on some recent deals within range of the states higher profile metro areas. That trend may continue as San Antonios growth drivers, including the Eagle Ford Shale, accelerate with the firming national economy.

2012 Sperry Van Ness International Corporation. All Rights Reserved. SVN, SPERRY VAN NESS, and the SPERRY VAN NESS COMMERCIAL REAL ESTATE ADVISORS logo are registered service marks of Sperry Van Ness International Corporation. All Sperry Van Ness offices are independently owned and operated. This is not an offering. A franchise offering can only be made through a Franchise Disclosure Document.

Its a different world out there.

It requires a different kind of commercial real estate firm working on your behalf in order to be successful. The Lipsey Company has ranked the Sperry Van Ness Organization as one of the most recognized commercial real estate brands in the US for a reason we know how to deliver a certainty of execution for our clients. Sperry Van Ness International Corporation is one of the largest commercial real estate franchisers with more than 175 locations in 36 markets.

Top Trends and Markets to Watch Reports

Trends Driving Commercial Real Estate in 2013 Apartment Trends and Top Markets to Watch in 2013 Industrial Trends and Top Markets to Watch in 2013 Office Trends and Top Markets to Watch in 2013 Retail Trends and Top Markets to Watch in 2013

Doug Carter 104 S. Cascade Ave. Suite 212 Doug.Carter@svn.com (719)520-1600 www.ColoradoApartmentBroker.com

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