The multi-family housing market is rather schizophrenic these days, with many developers who are looking to unload their projects reaping great rewards but with build-to-own landlords having a difficult time maintaining their profit margins.

"It's a very mixed picture," J. Ronald Terwilliger, chairman of Trammel Crow Residential, Atlanta, said recently at the Pillars of the Industry Conference in Boca Raton, Fla. "Capital rates are terrific and owners are making some great sales. But on the other hand, I have never seen so many concessions for so long. Landlords are offering four months free rent in some markets."

The Pillars conference is sponsored by the National Association of Home Builders' Multifamily Council, the Mortgage Bankers Association and the Urban Land Institute. Mr. Terwilliger, a former ULI chairman, is chairman of NAHB's Multifamily Leadership Board. And he isn't the only industry leader who worries that the market is out of kilter. Several others offered similar analyses.

Leonard Wood of Wood Partners, a Marietta, Ga.-based developer which has started some 12,000 units in the Washington area, the Southeast and Texas over the last five years, said the market is as tough as he's ever seen it.

And Doug Crocker, vice chairman of Equity Residential Properties, a Chicago-based real estate invest trust and, with more than 225,000 units, one of the nation's largest landlords, said the business is being hammered by the same low mortgage rates that has propelled the for-sale housing market. "Interest rates are killing us and saving us at the same time," he told the audience.

Wood said the availability of money to build is "as good as it's ever been as long as the property is seen as a 'good' project." Even in Atlanta, where many complexes has been beset with an unusually high percentage of vacancies, capital is readily available, he said. "But the question is, do you really what to build?" Wood's firm builds with the intention of selling as soon as a property leases up. And it is on the operations side where the company is being hurt. "Our economic yields are not very good," he said, noting that the company is being forced to offer an average of two months free rent to attract tenants. "And that means some properties are not very saleable."

Crocker of Equity Residential said the apartment sector is paying the price for riding the coattails of higher house prices. "In the '90s, we drafted in the price rises in the single-family sector," he told the meeting. "And we seduced ourselves into thinking it was a new paradigm.

"But we forgot one thing: We are absolutely tied to what it costs tenants to buy a house. And nowadays, with 100% financing, it doesn't cost them a dime." However, despite the "serious imbalances" that are developing in the multi-family sector, the market may not be as bad as it looks, at least on the surface, an expert in regional and local housing markets said at the conference. The key, he said, is job growth, which is even more important to the apartment market than it is to single-family housing.

While job growth is "still sluggish," Stanley Duobinis, assistant vice president and director of forecasting at the NAHB, noted that 21 states are experiencing year-over-year gains. "This is not a 'jobless' recovery; it just feels that way," he said.

Unfortunately, total employment is still down in 30 states. And even in the states which enjoyed growth, it wasn't very strong. Indeed, just five states Nevada, Montana, Hawaii, Alaska and Kentucky saw their employment numbers increases by more than 1 percent from December 2001 to December 2002.

Multi-family housing is dependent on strong job markets because apartments are often the choice of young, single people with one income, the NAHB economist explained. When jobs are plentiful, these people tend to strike out on their own. But when the market is tight, they move back home or double or even triple-up with roommates.

"Local housing demand depends on local household formation, which depends on job creation," Duobinis said. "So strong job markets lead to strong housing markets."

Currently, states with strong construction markets, defense spending and health care and travel industries are likely to have strong housing markets. But those dependent on the airline industry, the stock market, their state governments and manufacturing, particularly technology, are not.

Despite the lack of strong employment growth, or even any growth at all, multi-family starts were up at least 5 percent last year in 29 states. In ten of those jurisdictions, moreover, production was by a third or more.

This year, the NAHB expects the apartment sector to expand in 26 states. But with the notable exception of California, Duobinis said, the largest percentage changes will be in small market states.

However, a leading authority on commercial real estate warned that the worst is far from over and predicted that vacancy rates in apartment communities with 40 or more units will continue to drift higher.

Lloyd Lynford, president of Reis Inc. in New York, said the vacancy rate won't peak until the first half of next year, when it will top out at 6.9 percent. Last year's rate for projects with 40 units or more in the nation's top 50 metropolitan markets was 6.3 percent.

Lynford, whose firm's Commercial Real Estate Value Index is published quarterly in the Wall Street Journal, laid the problem squarely at the feet of excess supply. "Despite the belief of some observers that the soft market in wholly attributable to sluggish demand, we disagree," he said. "The level of construction does not make any sense, even less so than in the 1990s. But the engine of construction has not yet shut down."

In the '90s, the analyst said, production declined by 70 percent. In contrast, production last year slipped by only 13 percent to 105,700 units. And an additional 117,000 units are in the pipeline for 2003.

But Lynford's "No. 1 cause for concern" isn't production, though; it's absorption or more precisely, the lack thereof.

Net absorption, or the rate apartments are rented, in last year's fourth quarter "plummeted" to only 3,600 units, reversing an improved pace of the previous two quarters, he pointed out. And the falloff "isn't just concentrated, he added, it's "fairly widely distributed."

In the fourth quarter, he said, 25 of the top 50 markets recorded negative net absorbtion. And for all of last year, 26 experienced negative demand. "I have been measuring the markets for the last quarter century and I can't find two other consecutive years during that period with negative absorption," Lynford said.

The analyst said effective rents resumed their free-fall in last year's final quarter, dropping 0.2 percent nationally, and blamed the decline largely on the proclivity of landlords to offer more and more concessions to fill their vacant apartments.

Of the 50 markets his firm follows, Lynford said, vacancy rates rose in 47 and effective rates declined in 30. As a result of all this, profits are eroding. "Unlike properties with multi-year leases," he said, "declining effective rents and occupancies have translated directly into eroding cash flows."

NAHB's chief economist, David Seiders, also decried the shape of the multi-family sector, saying he was "shocked and awed" by high production levels in the face of flagging fundamentals.

With vacancy rates "pretty darn high" and absorption rates at historic lows, Seiders said he's amazed that production is so high.

"It looks like everything is under control," he said. "You'd never know from looking at the freight-train momentum of multi-family housing starts that the market balance has deteriorated so badly."

Published: April 2, 2003

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When Lew Sichelman first started writing about housing in 1969, he was the youngest real estate writer in the country. Now, 37 years later, he's one of the oldest -- and most decorated. He has been rated the top housing columnist in the country by the National Association of Realtors as well as by his peers in the National Association of Real Estate Editors. Indeed, NAREE has recognized his work on numerous occasions. One year - due to his advancing age, he can't recall which one - he earned top honors in the annual NAREE Journalism Contest in three out of the four major writing categories. It was the first time one writer has won so many NAREE awards in a single year. Known for his ability to make even the most difficult topics understandable, Sichelman also has been honored by the National Association of Home Builders and the Mortgage Bankers Association. He began providing in-depth coverage of and consumer-oriented information about housing and housing finance at the Washington Daily News, where he was real estate editor. He held that same position for nine more years at the Washington Star, which purchased the News in 1972. The Star, a so-called "writer's newspaper" which also had the misfortune of being an evening paper, was put out of its misery in 1981, and Sichelman, who had begun self-syndicating his column in 1978, decided to become a full-time columnist. Today, his column, "The Housing Scene," is distributed by United Media to newspapers throughout the country. He also is on the staff of National Mortgage News, an independent newspaper which is considered the bible of the mortgage business. And he writes for numerous other publications, including MarketWatch.com, where he answers readers questions once a week, Sports Illustrated (don't ask), RealtyTimes.com, BigBuilder and others. Sichelman is married, the father of five and grandfather of eleven.