Apartment Real EstateSmart property investors choose markets that are characterized by a shortage of supply of apartments and surely not oversupply.The reason for choosing markets where demand for apartments exceed the supply of apartments is simple. Because in these markets apartment rents are very likely to be rising at least in the short run. Increasing rents is the key to increasing apartment values (assuming that market capitalization rates remain constant), which allow property investors to achieve higher capital gains. On the contrary, investing in apartment markets where there is oversupply (that is the supply of apartment units exceeds the demand) is not advised because in such markets rent are very likely to be declining at least in the short term. Declining apartment rents lead to declining net operating income, and, assuming apartment capitalization rates, remain constant this in turn, leads to declining apartment values and capital losses. Therefore in evaluating a market for apartment real estate investments it is important to evaluate how balanced are demand and supply not only at the time of purchase but also in the years ahead since properties are usually held for a couple of years before being resold.
But what vacancy rate is considered normal, that is, signifies that the demand for and supply of apartment real estate in a market are in balance? Generally, a 4-5% vacancy rate is considered as an indicator of a healthy apartment market, in which there is no significant imbalance between demand and supply. Therefore, an investor interested in investing in apartment real estate should be looking for markets where: 1) the apartment vacancy rate is at or lower than 5% and Condition 2 actually says that we should choose apartment markets in which the increase in the number of households is expected to be greater than the number of new apartment units that will enter the market. This is important because it will ensure that demand will continue to exceed supply. If the reverse is true, that is, the number of new apartment units that will enter the market is greater than the increase in the number of households in the market under consideration, then the apartment vacancy rate will be increasing and if it starts rising above the “normal level” of 4-5% it will generate downward pressures on the local apartment rents.
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