#josh markiewicz

There are three basic factors that are driving demand for apartments:

Increase in young adult renters

Downsizing by baby boomers

Decrease of homeownership due to poor economy

Developers have found that demand is high and supply is low for quality multifamily apartments across the country.  In addition to the three factors above, new construction has also been driven by the fact that many older properties need replacement due to obsolescence.

Certain major markets (and some tertiary) are seeing a “reverse migration” effect, where people are moving back to downtown and urban neighborhoods.  This has created demand for both new development and redevelopment.

In my market; Champaign, and across the country, on-campus student housing has become the Taj Mahal of multifamily.  Locally, I’ve seen cap rates dip below 6%, and have even seen some in the 4.5% range!  Even with rates at historic lows, it becomes difficult to receive the type of return that investors require when cap rates are in the 4%-6% range.

The National Multi Housing Council (NMHC) Quarterly Survey of Apartment Market Conditions has shown improvement across all four indexes that it measures for the seventh quarter in a row.  The quarterly survey looks at market tightness, sales volume, equity financing, and debt financing.  Even with continued new construction, demand has outpaced supply.

Looking forward, I would focus new investments in off-campus properties, value-add plays, and quality properties in good areas.  Depending on your market, I think urban/downtown assets could be a good play in 2013 as well.

How is multifamily performing in your market?

Where do you see the good bets in 2013?

Josh Markiewicz is a commercial real estate broker with Coldwell Banker Commercial Devonshire Realty (CBCDR), and can be reached at 217.352.7712 or [email protected].

The office market is arguably the worst performing asset class in Champaign-Urbana. We have over 3.2 million square feet of existing office space, of which roughly 650,000 square feet or 20% of that is vacant.  If we compare this to pre-recession numbers where office vacancy was around 10%, we can see that the market has deteriorated significantly and has yet to bounce back.

Compared to last year, we’ve seen rents decrease both in terms of price per square foot and through incentives.  Landlords are trying to think outside of the box, and are looking for different ways to make their buildings more attractive to tenants.

It’s become common practice for Landlord’s to offer free rent; ie., a 3-year lease would actually be a 39-month lease, where the first 3-months are rent free.  We’ve also seen an increased willingness by Landlord’s to build-out a space for a tenant, and also smaller incentives, like free utilities.  The common theme has been that many Landlord’s will do what is necessary to secure a high quality, good credit tenant.

Unlike rental rates, we haven’t seen much of a drop in building values compared to last year.  Values are down significantly compared to pre-recession numbers, but year-to-year they are relatively flat.  

There also isn’t a significant amount of office properties that are for sale.  My guess is that unless we start to see a strong turnaround where vacancies would decrease significantly, we might see more office properties come onto the market for sale.

In terms of new development, we simply haven’t seen much, especially in anything greater than 5,000 square feet.  One of the only new office projects that is currently under way is Regency Apartments’ new HQ building in southwest Champaign.  The 6,400 square foot building is going up near the southwest corner of Windsor Road and Field South Drive, just west of Regency’s 316-unit apartment complex; Windsor West.

I think a big reason that the office market has been struggling is that companies have leaned out and become more efficient since the great recession.  We’ve seen a lot of companies downsize both in terms of number of employees and building size, and are also seeing more people working from home or on the road.

I think the office market in Champaign-Urbana will eventually recover, but at a much slower pace than the other sectors.  It will probably take several years for the market to absorb the current vacancy, and will be awhile before we see much new development, especially on spec.  Any new development that we do see will most likely be smaller, build-to-suit opportunities, like Regency’s new HQ.

Josh Markiewicz is a commercial real estate broker at Coldwell Banker Commercial Devonshire Realty (CBCDR), and can be reached at 217.352.7712 or [email protected].