ApartmentResearch

M A R K E T
Philadelphia Metro Area

R E P O R T
Second Quarter 2012

Additional Financing Creates Investment Opportunities

The performance of the Philadelphia apartment market in the rst three months of 2012 oered further evidence that a sustainable recovery is taking hold. Vacancy has returned to a normal level in nearly all the metros submarkets, while property owners continue to realize greater success raising rents. Newly employed residents and recent graduates of local colleges and universities will further stoke tenant demand in the quarters ahead. As would be expected following several quarters of solid performance, the recovery is initiating a new construction cycle, as heralded by the start of construction in the rst quarter on a 319-unit rental in Center City. The pipeline of planned projects has also increased recently, but the potential impact on property operations will likely be modest as these projects represent a mere 3 percent of existing stock. In addition, developers appear to be focused on adding rentals in areas where tenant demand is the greatest, placing a large concentration of their projects in Center City and Main Line submarkets, including Bala Cynwyd. Encouraged by the steady improvement in property operations and the availability of low-cost debt, investors remain intensely active across the metro, with many current owners seeking to expand portfolios. Overall, a modest shortage of assets listed for sale persists, but property owners are increasingly acting to take advantage of strong investor demand and compressing cap rates, triggering a gradual rise in listings. Areas of interest include high-density locations in the Pennsylvania counties and prime locations in Camden County that oer relatively easy access to Center City. Generally, Class A properties trade at less than 6 percent, but cap rates on stabilized Class B product have compressed slightly to the mid-6 to 7 percent range, depending on property size, and usually draw multiple bids. Distressed properties also remain a target for many investors, though to a lesser degree than one year ago. Investors that once focused intently on troubled assets are instead increasingly diverting their attention to stabilized properties for more immediate cash ows and appreciation potential.

2012 Annual Apartment Forecast

1.0% increase in total employment

Employment: Employers in the metro will add 27,000 jobs in 2012, expanding total employment 1 percent. Approximately 2,500 positions were lost last year, although private-sector employers created 7,900 jobs.

1,000 units will be completed

Construction: In 2012, developers will complete 1,000 units, including the 233-unit Station at Bucks County. No market-rate properties were delivered in 2011.

70 basis point decrease in vacancy

Vacancy: Demand for rental housing will remain strong in 2012 and reduce the vacancy rate 70 basis points to 3.6 percent, or 60 basis points less than the level at the start of the recession. The release of pent-up demand and de-bundling of combined households sparked a 120-basis-point drop last year. Rents: With seasonal periods of high demand ahead, asking rents in the metro will rise 3.2 percent in 2012 to $1,077 per month, following a 2.2 percent jump last year. Concessions will ease further as eective rents climb 4 percent to $1,038 per month. Eective rents rose 2.5 percent last year.

3.2% increase in asking rents

Economy

Employment Trends
Metro United States

Employers in the metro hired 21,400 workers in the rst quarter this year, including 21,800 private-sector positions. The gain comes after approximately 5,200 jobs were cut in the second half of 2011. During the rst quarter, roughly 11,300 workers were hired in the Pennsylvania counties of the metro, while the four South Jersey counties added 7,300 jobs. Employers in Wilmington created 2,800 jobs in the rst three months of 2012. Despite the modest hiring spurt in the rst quarter and a 10-basis-point contraction in the unemployment rate to 8.2 percent, considerable slack remains in the local labor market. This will suppress income growth and potentially deter purchases of single-family homes by current renters. Outlook: Total employment will increase 1 percent, or by 27,000 jobs, in 2012. Last year, 2,500 positions were eliminated.

4%
Year-Over-Year Change

2% 0%

-2% -4%

08

09

10

11

12*

Housing and Demographics

Home Price Trends

Metro Median Home Price (Y-O-Y Change) United States

Measured year over year, the median price of an existing single-family home in the metro was unchanged at $206,600 in the rst quarter. About 47,000 homes were sold in the past 12 months, marking a 2 percent uptick from the prior year, but a level well below historic norms. Soft demand is keeping single-family developers on the sidelines. Developers pushed through permits for 4,700 units metrowide during the past year, representing a decline of about 2 percent from the preceding 12-month span. A minimum household income of $49,000 is required to aord the monthly mortgage debt on the existing median-priced home, but high down payment requirements and stringent mortgage qualications are deterring prospective rsttime homebuyers. Outlook: Restrained near-term rental construction and a limited migration of renters to for-sale housing will support a strong performance for the local apartment sector throughout 2012.

7% 0% -7%

-14% -21%

08

09

10

11

12*

Construction

Construction Trends
Completions Multifamily Permits

Minimal additions to market-rate stock have occurred. During the 12 months ending in the rst quarter this year, only the 97-unit 600 on Broad in Center City came online. Multifamily developers are becoming more condent, as 6,500 market-rate units are planned in the metro, an increase from 4,100 rentals six months ago. Only a few projects are advancing, as roughly 1,700 units of for-sale and rental multifamily housing were permitted in the past 12 months, a decrease of 8 percent from the preceding year. Additions to the pipeline of planned projects over the past half year include the 612-unit Renaissance Walk in Pennsauken and 159 units in the Bordentown Transit Village project in Burlington County. The latter project is slated to break ground in the second quarter this year and be ready for occupancy in 2014. Outlook: Developers are on track to add 1,000 market-rate rentals in the metro this year, the highest annual output in four years.
Marcus & Millichap

4
Number of Units (thousands)

3 2 1

08

09

10

11

12*

* Forecast

page 2

Apartment Research Report

Vacancy

Metrowide vacancy declined 40 basis points in the rst quarter to 3.9 percent, and is 110 basis points less than the level recorded in the rst three months of 2011. Since peaking at the end of 2009, resurgent demand and limited additions to stock have driven down the vacancy rate 260 basis points.
Vacancy Rate

Vacancy Rate Trends

Metro United States

10% 8% 6% 4%

Strong demand reduced Class A vacancy 40 basis points to 4.2 percent in the rst quarter. As a result, vacancy in the upper tier is 120 basis points less than one year ago. The Class B/C rate has declined 90 basis points over the past 12 months to 3.7 percent, including a 20-basis-point drop in the rst three months this year. Demand for in-city residences pushed down the vacancy rate 40 basis points over the past year in Center City to 4.1 percent, the lowest rate in seven years. Among the South Jersey submarkets, vacancy in Cherry Hill/Evesham/Medford ticked down 20 basis points in the rst quarter, and 90 basis points in the past year, to 8.5 percent. Outlook: Demand for rental housing remains strong and will reduce the vacancy rate 70 basis points to 3.6 percent during 2012. The rate decreased 120 basis points last year.

2%

08

09

10

11

12*

Rents

Rent Trends
Asking Rent Effective Rent

Year-Over-Year Change

Average asking rents rose 0.2 percent in the rst quarter to $1,046 per month, while eective rents added 0.6 percent to $1,004 per month. Since the rst quarter of last year, asking and eective rents have climbed 1.9 percent and 2.4 percent, respectively. In the Class A segment, average asking rents in the rst quarter were 2.1 percent more than one year earlier, at $1,249 per month. A 0.2 percent increase was recorded in the rst three months of this year. With a vacancy rate of less than 4 percent, Class B/C asking rents also continue to rise, posting a 0.2 percent increase in the rst quarter to $853 per month. Year over year, asking rents in the Class B/C segment have advanced 1.3 percent. Outlook: In 2012, average asking rents will rise 3.2 percent to $1,077 per month, accompanied by a 4.0 percent surge in eective rents to $1,038 per month.

6% 3% 0% -3% -6%

08

09

10

11

12*

Sales Trends**

Median Price Per Unit (thousands)

Investor demand for apartments remains keen, driving a 20 percent increase in transaction velocity over the past 12 months. As measured by dollar volume, institutions increased their purchases threefold during the period. The median price of properties sold in the past 12 months was $71,600 per unit. In the preceding 12 months, sales of several high-end properties, plus lower velocity, yielded an anomalous median price of $80,400 per unit. Newer, institutional-caliber properties generally price at cap rates in the 5 percent range, but genuine, stabilized Class B product in strong locations typically trade in the mid-6 to 7 percent range. Outlook: With greater transparency on values and a narrow bid-ask spread, investors will continue to take advantage of strengthening property operations, limited near-term construction and low interest rates to execute transactions in the months ahead.

Sales Trends
$90

$75

$60

$45

$30

07

08

09

10

11

* Forecast ** Trailing 12-Month Period Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics page 3

Marcus & Millichap

Apartment Research Report

Capital Markets
By WILLIAM E. HUGHES, Senior Vice President, Marcus & Millichap Capital Corporation

Visit www.NationalMultiHousingGroup.com or call:

John Sebree Director, National Multi Housing Group Tel: (317) 218-5300 john.sebree@marcusmillichap.com

The national apartment markets strong performance continued in the rst three months of 2012 as the vacancy rate slipped 30 basis points to 4.9 percent, marking the eighth consecutive quarterly decline. As conditions continue to improve, renancing and disposition options for owners will expand to some owners that were underwater two years ago. Despite a brief increase to approximately 2.3 percent during the period, the interest rate on the 10-year Treasury ended the rst quarter at about 2 percent. Capital continues to ow into safe-haven investments such as U.S. government debt amid lingering uncertainty over the eurozone. Fannie Mae and Freddie Mac will have unlimited nancial support from the federal government through the end of this year. However, Congress will weigh a number of proposals to sunset the GSEs over the next decade and privatize the secondary mortgage market. The entities accounted for 65 percent of apartment mortgage originations last year. Access to acquisition nancing continues to improve. Loans from portfolio lenders are issued at LTVs ranging from 70 percent to 80 percent, while the government agencies will work at the high end of the range on the highest-quality properties. All-in rates on mortgages of $3 million and more start in the mid-3 percent range for terms of ve years, while 10-year debt varies from the low- to mid-4 percent region. Rates for smaller assets can rise up to 30 basis points to 75 basis points higher.

Submarket Vacancy Ranking

Rank
1 2 3 4
Prepared and edited by

Submarket
Upper Bucks County Somerton/Bustleton Foxchase/Lawndale Torresdale/Bensalem Gloucester County Lower Bucks County NE Chester/Upper Montgomery County West Delaware County Roxboro/Chestnut Hill Upper/Lower Merion North Delaware County University City Central Chester Abington/Upper Dublin Center City East Delaware County Germantown Lansdale/Gwynedd Burlington County West Chester Olney/Oak Lane Camden West Camden Moorestown/Maple Shade/Mount Laurel

Vacancy Rate
2.1% 2.2% 2.6% 2.9% 3.2% 3.3% 3.4% 3.4% 3.5% 3.6% 3.9% 3.9% 4.0% 4.1% 4.1% 4.2% 4.3% 4.3% 5.0% 5.0% 5.4% 5.9% 6.4% 7.0%

Y-O-Y Basis Point Change

-10 30 30 -30 -80 -40 -10 10 -10 -30 -100 -80 10 -40 -40 -20 -50 -50 -40 -50 -100 -60 -50 -50

Effective Rents
$1,085 $817 $736 $896 $894 $889 $979 $895 $1,081 $1,103 $1,144 $906 $1,181 $1,174 $1,610 $789 $886 $1,091 $861 $961 $706 $849 $844 $968

Y-O-Y % Change
2.5% 3.4% 3.1% 2.6% 2.6% 3.3% 3.7% 3.3% 3.1% 2.8% 3.2% 2.6% 3.1% 2.9% 3.2% 3.5% 3.1% 2.6% 3.0% 2.1% 2.9% 2.2% 2.2% 2.3%

5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Art Gering
Senior Analyst Research Services For information on national apartment trends, contact

John Chang
Vice President, Research Services Tel: (602) 687-6700 john.chang@marcusmillichap.com Philadelphia Oce:

Spencer Yablon
Regional Manager syablon@marcusmillichap.com !01 W. Elm Street Suite 600 Conshohocken, Pennsylvania 19428 Tel: (215) 531-7000 Fax: (215) 531-7010

Price: $150

Marcus & Millichap 2012 www.MarcusMillichap.com

The information contained in this report was obtained from sources deemed to be reliable. Every eort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment growth is calculated using seasonally adjusted quarterly averages. Sales data includes transactions valued at $500,000 and greater unless otherwise noted. Sources: Marcus & Millichap Research Services, Bureau of Labor Statistics, CoStar Group, Inc., Economy.com, National Association of Realtors, Real Capital Analytics, Reis, TWR/Dodge Pipeline, U.S. Census Bureau.