US MULTIFAMILY APARTMENT MARKET

Apartment owners in the U.S. benefit when mortgage rates rise, since this encourages people to rent rather than buy. Single family home inventories have climbed as rising interest rates make home ownership less attractive. The inventory of U.S. houses for sale has soared to the highest levels since 1999 and prices have fallen for the first time in 11 years. "Late Payments, Foreclosures Hit All-Time High in First Quarter" causing apartment rental increases. Associated Press, Thursday, June 14, 2007

"What's good for homebuilders is bad for apartments and vice versa,'' said James Corl, head of real estate investment at New York-based Cohen & Steers Inc., where he has $16 billion under management. In the apartment market, ``demand is going to be swamping supply for the next few years."

On a national basis, despite mixed signals, both demand and supply driven factors indicate that the outlook for the U.S. multifamily housing market is strong. Although home ownership rates are increasing, regulatory barriers to development are generally on the rise, and several other factors bode well for the multifamily rental sector, including declining vacancy rates, near-term softness in single-family home demand, rising mortgage rates and declining home ownership affordability. The most critical component of long-term multifamily demand in the United States is population growth. The nation’s population is expected to increase by about three million people per year through 2020. Assuming historical household size and rental propensities hold, this rate of growth will require new construction of roughly 420,000 incremental multifamily units per year across the United States.

However, if rental propensities decline as they have done over the last decade, less than 100,000 multifamily units will be needed to meet expected demand each year. In addition to demographic growth, demand for new multifamily units will also be driven by the need to replace existing units.

The apartment rental market – multifamily housing – is experiencing increased demand from the slowdown in home sales. With a rising population and a growing number of households, vacancies are tightening and rents are rising. Multifamily vacancy rates are projected to average 5.4% in the current quarter, down from 5.9% in the fourth quarter of last year, and then continue to decline to 5.1% by the end of 2008. Average rent is likely to rise 3.1% for 2007 and 3.8% next year, following a 4.1% increase in 2006.

Multifamily net absorption is expected to total 234,400 units in 59 tracked metropolitan areas in 2007, below the 229,500 last year, but should rise to 245,800 in 2008. The areas with the lowest apartment vacancies include Northern New Jersey, Salt Lake City, San Jose, San Diego, Nashville and Philadelphia, all with vacancy rates of 3.3% or less. Multifamily transactions in the first 10 months of this year totaled $62.3 billion, compared with $87.4 billion for all of 2006. The sale of buildings originally constructed as condos are being sold to multifamily investors in markets like Washington, D.C., and South Florida. Many markets have seen condo “for sale” signs change to “apartment for lease” signs almost overnight.

Some condominium complexes are being converted into office buildings, and others are becoming mixed-use projects. It took more than fifty years for the U.S. population to grow from 100 million to 200 million in 1967, and not quite forty more years for it to reach 300 million in October 2006. Over the past 20 years, the U.S. population has grown slightly in excess of 1% per annum – a significant distinguishing feature of the U.S. economy relative to other developed economies. About two thirds of this growth is due to more births than deaths (among those already in the country), while the other third is due to immigration. Over the next 20 years, this rate of growth in the U.S. population is expected to continue, barring any major change in birth rates or immigration. But not all areas of the country will grow equally. Why do some places achieve substantially higher population growth while others lag far behind? Because high growth occurs where people want to live and play, where firms find it efficient to produce, where the necessary approvals can be attained to accommodate desired growth, and where “wild card” factors align.

Projecting long-term housing demand is conceptually straightforward. There are three primary factors that drive the need for new multifamily units in the United States:

o annual household growth,

o age specific rental propensities, and

o annual inventory destruction.

Despite declining rental propensities, the outlook for the multifamily construction market is far from bleak, due to both increasing population and, in large part, the need to replace the nation’s aging multifamily inventory. In fact, according to our analysis, if age cohort rental propensities (the percentage of the population likely to rent) continue their long-term decline, we forecast that just under 1.3 million total multifamily units will need to be constructed in the U.S. through 2020, just 92,000 per year. That works out to be an average annual loss of 65,000 rental households for the next fourteen years, offset by an annual average need to replace 157,000 units that are destroyed. On the other hand, if age cohort rental propensities remain constant at 2006 rates, we forecast about 5.9 million total new rental units will be required (418,000 per year for the next 14 years.)

Why are Multifamily Apartment Buildings the Greatest Asset Type of the Real Estate Asset Class?

Mitigation of Lease Rollover Risk: Apartment Buildings targeted by America 2030 range from 100 to 1,000 occupants working in varied industries. At any one time only 3% to 12% of the building will ever be vacant, in the assets we target.

Lower Taxes: Owning 100 units in a 100 unit condominium building may seem like the same thing as owning a 100 unit apartment building. It is not for several reasons, not the least of which is having one tax parcel identification number rather than 101 tax identification numbers.

Barriers to Entry: Apartment building zoning is the most difficult to obtain of the four asset types because it has the largest negative impact on school budgets. High barrier to entry equals difficulty on competition.

Rent Growth: Office, retail and industrial rents have not kept pace with replacement costs, nor construction costs. There are only two ways that real estate prices increase, artificially through cap rate compression (more dollars chasing less assets), and fundamentally through rent growth.

American Mobile Lifestyle: Eighteen percent of all American move annually; One third of all Americans live in Apartment Buildings.

Shelter—Economic Condition Resilience. When people cannot afford anything else they still spend on two things—Food and Shelter.

Multifamily assets, defined as self-contained housing units that offer residents an alternative to home ownership, often called apartments or “flats” in foreign markets, are income-producing assets that offer investors reliable returns. Over the past 150 years, multifamily assets have produced consistent appreciation in value throughout the United States, largely a result of the ability to increase rents annually.

America 2030 Equity locates assets in target markets such as Nevada, Arizona, and Florida, which have historically produced quality assets with high occupancy and rental rates.

We target class A & B assets that may offer investors an annual cash yield in addition to possible capital appreciation. We do this by locating stabilized multifamily assets that exhibit steady cash-on-cash returns and annual rental increases. We grow equity through a long-term hold strategy and steady appreciation year-over-year. Leverage also plays a key role in maximizing return on equity and internal rate of return, whereby we evaluate acceptable levels of debt, which increases the amount of assets that can be purchased.

Buyer Composition by Asset Type (Source: IREI)

Capitalization Rates for Multifamily are the Lowest: I.E. The Safest American Asset Type (Source: IREI)

Source: NAREIT

Source: National Council of Real Estate Investment Fiduciaries

Percentage of Apartments Offering Concessions

Source: Axiometrics

America’s Fastest Growing Cities, 2008-2020

Source: US Census Bureau