Philadelphia Metro Area

Third Quarter 2011

TIGHT VACANCY, RISING RENTS SPARK INVESTOR INTEREST

Vacancy has declined and rents have recovered from recessionary levels in the Philadelphia metro, but softening in the job market at midyear will slow the markets positive momentum in the second half of 2011. After adding jobs in the rst four months of the year, payrolls contracted in the second quarter as the U.S. economy sputtered. Nonetheless, most of the decline in vacancy projected in 2011 has already been recorded, but an additional, albeit smaller decrease remains on track in the nal six months of the year. A sufcient number of job sectors will expand, leading to a slight increase in household formation in the second half. This modest improvement will boost tenant demand will lower vacancy as construction activity remains limited, a trend which will persist for several more quarters. Rents, too, continue to rise gradually in many areas of the metro, although properties in working-class areas slightly trail overall growth. The pace of investment activity in the market continues to accelerate, and most product listed for sale will generate keen competitive bidding, spurred by greater access to nancing. During the rst half of this year, interest in genuine, best-quality Class A properties has been intense, with aggressive pricing pushing down cap rates to less than 6 percent in many instances. Vigorous bidding on these properties continues to push many investors down the quality scale in search of capturing higher yields. As a result, Class B assets in primary Class A locations will trade briskly as the year progresses, with cap rates falling as much as 75 basis points this year to the low- to mid-6-percent range. Class B properties in lesser locations will also garner interest in the coming months, although many buyers will seek discounts for this type of asset. Financing is generally expanding for qualied borrowers, with many regional lenders attempting to capture market share.

2011 ANNUAL APARTMENT FORECAST

0.7% increase in total employment

Employment: A modest pace of hiring in the second half of 2011 will yield a gain of 19,500 jobs in the metro area this year, a 0.7 percent increase. In 2010, local employers added 11,400 jobs.

500 units will be completed

Construction: Developers will complete 500 units in 2011, a decline from 731 rentals delivered last year. Multifamily permit issuance appears on track for approximately 1,600 units this year, less than half the historical average annual issuance.

110 basis point decrease in vacancy

Vacancy: Demand growth will slightly ease over the second half of the year as employers adjust hiring plans due to slower economic expansion. This year, the vacancy rate will fall 110 basis points to 4.4 percent, following a 100 basis point decline in 2010.

3.0% increase in asking rents

Rents: Tight vacancy will enable owners to raise asking rents in the metro 3 percent in 2011 to $1,053 per month, compared with a 2 percent increase last year. Effective rents will advance 3.5 percent this year to $1,008 per month after rising 3 percent in 2010.

ECONOMY

Employment Trends
4%
Year-over-Year Change Metro Area United States

The local employment market could not gain traction in the rst half of this year. Following the addition of 6,800 positions in the rst quarter, 8,900 jobs were eliminated in the second period, including 6,300 private-sector jobs. Private-sector job losses occurred primarily in May, when 8,500 positions were eliminated. In the manufacturing sector, 3,900 jobs were cut during the month, likely stemming from supply-chain interruptions. In the entire second quarter, 3,700 manufacturing workers were pared from payrolls. Overall, four of 10 private-employment sectors added workers during the second quarter. Leisure and hospitality employers created 2,500 positions in anticipation of summer travel season, while retailers and transportation providers added about 800 workers. Outlook: A modest pace of hiring in the second half of the year will yield a gain of 19,500 jobs in the metro area this year, a 0.7 percent increase. In 2010, local employers added 11,400 jobs, following a loss of 130,000 positions in the preceding two years.

2% 0% -2% -4%

07

08

09

10

11*

* Forecast Sources: Marcus & Millichap Research Services, BLS, Economy.com

HOUSING AND DEMOGRAPHICS

Median Existing Home Price (Y-O-Y Chg.)

Home Price Trends

4% 0% -4% -8% -12%
Metro Area United States

Permits for about 1,900 units of multifamily housing were issued in the 12 months ending in the second quarter, a 5 percent drop from one year earlier. Issuance in South Jersey fell 7 percent during the period to 700 units, but a 25 percent decrease to less than 200 units occurred in Wilmington. The number of sales decreased about 20 percent in the 12 months ending in the second quarter, but the median price of an existing single-family home retreated only 2 percent, to $213,600. Renting remains the most feasible housing option for a large portion of the households in the metro. The minimum income required to purchase the median-priced home was $50,100 in the second quarter, a threshold not met by more than 900,000 local households. Outlook: The prolonged slump in multifamily permitting will minimize competition for existing rental properties for several more quarters.

07

08

09

10

11*

* Trailing 12-Month Period Sources: Marcus & Millichap Research Services, Economy.com, NAR

CONSTRUCTION

Construction Trends
4.8
Number of Units (thousands) Apartment Completions Multifamily Permits

Limited development persists, as no new rentals were delivered in the market in the rst half of the year. Over the 12 months ending in the second quarter, two properties comprising 585 units were delivered, compared with 434 rentals in the prior year. The 309-unit Londonbury at Millenium in Conshohocken came online in the third quarter last year, and 276 units at the Mansion at Bala in the BalaCynwyd submarket were delivered at the end of 2010. Only 500 units are slated for delivery in 2011. Projects recently started include the 97-unit 600 N. Broad St., and Jefferson at West Goshen in Chester County, which contains 230 rentals. Projects consisting of an additional 3,800 units are planned and await possible advancement to groundbreaking. Outlook: In 2011, developers will complete 500 units, consisting of primarily the 317-unit Abitare in Camden County. Last year, 731 new units were placed in service.
Marcus & Millichap

3.6 2.4 1.2 0.0

07

08

09

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11*

* Forecast Sources: Marcus & Millichap Research Services, U.S. Census Bureau

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Apartment Research Report

VACANCY

Decent job creation earlier in the year, combined with no completions, supported a 30 basis point decline in vacancy in the second quarter to 4.7 percent. Thus far in 2011, net absorption of nearly 1,700 units has reduced the vacancy rate 80 basis points in the metro. In Pennsylvania submarkets, vacancy was 4.1 percent in the second quarter, a decline of 90 basis points since the end of 2011. More than 1,200 additional units were occupied in the rst six months of this year, with signicant gains recorded in the Center City and Germantown submarkets. The vacancy rate in South Jersey dipped 30 basis points in the second quarter to 6.3 percent and has fallen 80 basis points year to date. Net absorption in the rst half of 2011 totaled 400 units. Outlook: The vacancy rate in the metro will decline 110 basis points this year to 4.4 percent, following a 100 basis point drop in 2010.
Vacancy Rate

Vacancy Rate Trends

10% 8% 6% 4% 2%
Metro Area United States

07

08

09

10

11*

* Forecast Sources: Marcus & Millichap Research Services, Reis

RENTS

Asking rents surged 0.5 percent in the second quarter to $1,032 per month, the fth consecutive quarterly increase. Asking rents in the metro have risen 1 percent so far this year. Effective rents also advanced in the second quarter, recording a 0.6 percent jump to $986 per month. The 1.2 percent increase in effective rents posted during the rst half of 2011 reduced average concessions 20 basis points to 4.5 percent of asking rents. In the Pennsylvania portion of the market, effective rents have risen 1.3 percent year to date, to $1,017 per month, including a 0.8 percent gain in the April-to-June period. Following a 0.5 percent bump in the spring quarter, effective rents in South Jersey have climbed 1 percent over the past six months. Outlook: In 2011, asking rents will rise 3 percent to $1,053 per month, accompanied by a 3.5 percent increase in effective rents to $1,008 per month.
6%
Year-over-Year Change

Rent Trends
Asking Rent Effective Rent

3% 0% -3% -6%

07

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09

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11*

* Forecast Sources: Marcus & Millichap Research Services, Reis

SALES TRENDS**

Transaction velocity increased 65 percent over the past 12 months. Sales of large properties surged, but expanded access to nancing supported a 37 percent increase in the number of properties with fewer than 100 units that changed hands. The median price of properties sold ticked down about 2 percent over the past year to $80,400 per unit. Prices in deals for large properties varied widely, with distressed assets selling for about $35,000 per unit and betterquality complexes transacting at $100,000 or more per unit. Cap rates start at approximately 6 percent or less for the best-quality Class A assets. Class B properties in the best primary locations generally trade from the low- to mid-6-percent range following a tightening trend over the past six months. Outlook: Encouraged by low vacancy, gradual rent growth and a limited supply growth in the near term, a large pool of prospective investors will sustain a steady ow of deals in the months ahead. Investors will continue to migrate down the quality chain in search of higher yields.
Median Price per Unit (thousands)

Sales Trends
$90 $80 $70 $60 $50

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11*

* Trailing 12-Month Period Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

** Data reect a full 12-month period, calculated on a trailing 12-month basis by quarter.

Marcus & Millichap

Apartment Research Report

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CAPITAL MARKETS
BY WILLIAM E. HUGHES, SENIOR VICE PRESIDENT, MARCUS & MILLICHAP CAPITAL CORPORATION

Visit www.NationalMultiHousingGroup.com or call:

Apartment mortgage rates should remain favorable through 2011, enhancing property returns and supporting values. While the 10-year Treasury yield likely will remain in the low- to mid-3 percent range over the next few quarters, the relatively wide spread to all-in lending rates provides some cushion against potential upticks.

Hessam Nadji Senior Vice President, Managing Director Tel: (925) 953-1700 hnadji@marcusmillichap.com

Encouraged by sustained improvements in occupancy and rents, nearly all lending sources have increased funding for apartment deals. As a result, mortgage debt has become readily available for performing assets across markets and property classes, supporting a 40 percent increase in multifamily origination volume over the past six months when compared to the previous period. The agencies continue to dominate but have lost marketshare as insurance companies, private capital sources and local/regional banks, in particular, compete more aggressively for new business. In the near term, life insurance companies will continue to favor larger, best-of-class assets in primary markets, while local and regional banks focus on lower-quality assets with consistent revenue streams and strong, proven sponsorship. Underwriting requirements eased over the past year as strengthening apartment fundamentals and rming property values restored lenders condence in the market. Debt-service coverage requirements slipped to 1.15 to 1.25, while loan-to-values on new loans generally improved to 70 to 75 percent, and in some limited situations, have pushed to as high as 80 percent. Vacancy Rate
2.2% 2.5% 2.6% 3.5% 3.6% 3.8% 3.9% 3.9% 4.0% 4.0% 4.2% 4.4% 4.5% 4.5% 4.7% 4.9% 4.9% 5.3% 5.4% 5.5% 6.4% 6.5% 6.9% 7.5% 8.4% 9.6% 9.7% 10.0%

SUBMARKET VACANCY RANKING

Rank
1 2 3 4 5 6 7
Prepared and edited by Senior Market Analyst Research Services For information on national apartment trends, contact Vice President, Research Services Tel: (602) 687-6700 ext. 6803 john.chang@marcusmillichap.com Philadelphia Ofce: Regional Manager syablon@marcusmillichap.com 101 West Elm Street Suite 600 Conshohocken, Pennsylvania 19428 Tel: (215) 531-7000 Fax: (215) 531-7010 Price: $150 Marcus & Millichap 2010 www.MarcusMillichap.com

Submarket
Somerton/Bustleton Foxchase/Lawndale Upper Bucks County West Delaware County Torresdale/Bensalem Roxboro/Chestnut NE Chester/Upper Montgomery Central Chester Lower Bucks County Upper/Lower Merion Gloucester County East Delaware County Center City Abington/Upper Dublin West Philadelphia Germantown North Delaware County Lansdale/Gwynedd Burlington County West Chester Olney/Oak Lane Camden West Camden Moorestown/Maple North/Frankford Cherry Hill/Eversham Norristown/Plymouth Bala Cynwyd

Y-O-Y Basis Point Change

-30 -80 -100 -250 -110 -150 -150 -100 -190 -140 -130 -120 -160 -140 -190 -120 -160 -30 -200 -190 -150 -60 -20 -70 -180 -60 -190 -10

Effective Rents
$795 $716 $1,065 $871 $878 $1,054 $950 $1,153 $866 $1,079 $876 $767 $1,569 $1,148 $888 $864 $1,115 $1,069 $841 $947 $690 $836 $831 $953 $744 $1,051 $1,098 $1,034

Y-O-Y % Change
1.2% 0.2% 1.9% 3.5% 3.6% 4.1% 3.9% 4.1% 3.6% 0.4% 2.7% 2.6% 4.9% 0.3% 3.2% 1.8% 1.5% 2.9% 3.3% 2.0% 0.3% 2.2% 1.3% 3.6% 2.7% 1.9% 4.4% 8.4%

8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Art Gering

John Chang

Spencer Yablon

The information contained in this report was obtained from sources deemed to be reliable. Every effort 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.