Louisville apartment vacancy rates are on track to fall to historical lows in 2011, as Louisville businesses are expected to add 15,000 workers this year, according to Encino, Calif.-based Marcus & Millichap Real Estate Investment Services .

In a report on the outlook for the Louisville market, Marcus & Millichap said it expects about 5,200 jobs to be added this year in the logistics and utilities sector.

“Job creation in these industries will bolster demand for Class B/C rentals, especially due to the modest wages typically associated with those positions,” according to the report.

But the education and health services field is expected to add 4,000 jobs in the Louisville area, which would bolster demand for Class A rentals.

No new apartment developments are expected to come online this year, according to the report, which will further put downward pressure on vacancy rates.

The company is expecting the vacancy rate for the Louisville area to fall to 4.7 percent this year, with average asking rents rising 2.5 percent to $664 per month and effective rates rising 2.9 percent to $635 per month.

Last year, asking rates rose 1.1 percent and effective rates rose 1.5 percent.

As Business First reported last month, local apartment owners have seen demand rise in the past year. For instance, The Mallard Crossing apartment complex in St. Matthews has 99 percent of its units leased.

The Marcus & Millichap report said it also expects sales of apartment complexes to heat up this year, with buyers being motivated by low interest rates. Complexes in core locations, especially near the University of Louisville , should command multiple offers, according to the report.

The median price of apartment properties sold in Louisville over the past year was $40,500 per unit, an 8 percent increase from the previous 12-month period.

Economists are divided over the commercial real estate implications of Friday’s historic downgrade of U.S. debt. Standard & Poor’s decision to lower its rating on long-term U.S. Treasury bonds from AAA to AA+ is, by itself, unlikely to affect commercial real estate investors directly, say experts.

Even so, the stock market plunged on Monday, the first day of trading since the downgrade. The Dow fell 4.8% from Friday’s close to 10,897, while the S&P 500 and Nasdaq each declined 6.1% to close at 1,127 and 2,378, respectively.

Should Monday’s investor panic mushroom into a wide-scale pullback by businesses and consumers, property fundamentals and investors will inevitably suffer.

“With fears mounting across the world about unsustainable debt levels and slowing economic growth, individuals and businesses may curtail spending and hiring,” says Victor Calanog, chief economist at New York-based Reis. “The specter of high inflation with slow growth — or even a double-dip recession — can no longer be easily ignored.”

The rating change will have little effect on investors, however, and is simply a confirmation of various negative factors that have eroded market confidence in the last two weeks, says Calanog, referring to the fierce political battle in Washington to either slash spending or raise the nation’s debt ceiling.

Looking beyond Monday’s reactionary sell-off in the stock markets, Calanog points to long-term trends that suggest the economy is making progress toward recovery.

Nearly lost amid news reports about the credit downgrade and stock market reaction was last Friday’s nonfarm payroll report, which showed that the economy added 117,000 jobs in July and the unemployment rate held nearly steady at 9.1%.

Job growth is occurring, albeit at a disappointing pace, says Calanog. The economy added 930,000 jobs in the first seven months of 2011, nearly equal to the 940,000 jobs created in all of 2010.

“We are at a critical point in the economic cycle, with mixed signals implying neither uniformly bad nor uniformly good results,” emphasizes Calanog.

Deep concerns

Other forecasters see a more direct threat to commercial real estate performance coming from S&P’s downgrade of U.S. debt. One of those is economist Sam Chandan, president and chief economist at Chandan Economics in New York.

Like Calanog, Chandan believes the downgrade is more likely to affect investor sentiment than property performance, at least in the short term. But sentiment can be a powerful force, particularly for a weak and vulnerable economy.

“The negative impact of S&P’s move on investor and consumer sentiment is a real issue that will negatively impact global equity markets and undermine confidence,” warns Chandan.

“While the downgrade was largely anticipated and did not present any new information about the riskiness of U.S. Treasuries, it has certainly inflamed investors’ concerns that the recovery is faltering,” adds Chandan.

Ironically, anxiety and risk aversion prompted by S&P’s action is driving investors to buy up the very Treasury securities that the rating agency downgraded, notes Chandan.

In response to increased demand, the yield on the 10-year Treasury fell to 2.33% on Monday from 2.57% late Friday. (Bond yields move inversely to prices, so as prices rise the yields fall.)

That trend will be short-lived, however, Chandan predicts. “In the medium and long run, Treasury rates will rise as global bond investors slowly diversify into the sovereign debt of other highly-rated countries with more functional legislatures and healthier public finances, including Australia, Canada, and Germany.”

Capital costs to rise

The emerging consensus among the U.S. commercial real estate community is that long-term interest rates will begin to rise in the near future. This is especially true for multifamily borrowers who have relied on Fannie Mae and Freddie Mac to finance their projects. S&P downgraded both agencies from AAA to AA+ on Monday, which will push up mortgage borrowing rates in many markets, according to Chandan.

Chandan and Calanog agree that commercial real estate values will suffer in a rising interest rate environment unless fundamentals improve sufficiently to boost property income.

“Commercial real estate investment conditions are improving, but rising capital costs mean that we need stronger fundamentals in support of price momentum,” says Chandan.

To Calanog, whether commercial real estate fundamentals improve or stagnate in the second half of 2011 depends less on credit ratings than on how well businesses and consumers manage their economic fears.

“What will ultimately mean a terrible second half [of 2011] for commercial real estate? If changing expectations lead to an economic pullback,” says Calanog. “S&P is just holding up a mirror, showing us that the U.S. may no longer be the fairest of them all.”

In all, $23 billion in apartment assets traded in the first half of 2011, which marked a $104 million year-over-year improvement from 2010. The $14 billion in volume that traded in the second quarter alone was the most active period since the fourth quarter of 2010, which was a busy quarter thanks to end-of-the-year sales. 2011’s second-quarter tally may have been impressive then with volume surging 132 percent on a year-over-year basis, after the first quarter’s 72 percent increase.

In some brokerage shops, things feel like they did during the boom years of 2006 and 2007. “In the first half of the year, in Las Vegas, Phoenix, Vegas, and Florida, the level of activity was similar to what we saw in 2005, 2006, and the early part of 2007,” says Nick Ingle, director of capital markets at the Phoenix office of Hendricks & Partners. “We knew the activity would be busy, but this has been a surprise.”

Peter Donovan, senior managing director of Los Angeles-based CB Richard Ellis’ Multi-Housing Group, says his company’s sales volume is up about 30 percent this year. “The volume is up a lot,” he says. “It’s broad-based in a number of markets.”

Behind the sales numbers was even more proof of the overall health of the market. RCA characterized pricing as “stable” with per-unit prices averaging about $100,000 in the second quarter. However, there is pricing pressure in the top markets with 10 percent of the properties in those metros going for 4.7 percent or less.

Further showing the health of the market were the offerings from distress. 2011’s second-quarter offerings from distress were $2 billion, which was the smallest since the second quarter of 2008. But not everyone is seeing this. “I think that distress sales activity is increasing, but the number of properties in default is going down,” Ingle says.

Portfolios sales also picked up $3.2 billion in the second quarter, which passed last year’s total. Nineteen individual properties and 10 portfolios traded for $10 million or more in the first half of the year.

Garden apartment sales, which saw volume of about $14.2 billion, were well ahead of high-rises. The quarter saw $24.8 billion of new garden offerings, which was the highest offering in three years. RCA attributes this surge to investors looking for higher yields, which they could find in the garden sector.

Manhattan, Los Angeles, and Washington, D.C., all saw more than $1 billion in volume trade hands in the first quarter, while Atlanta was close behind. San Francisco, Chicago, and Boston moved into the top 10 for volume, while Houston and Orange County saw volume fall off. Smaller markets also gained a foothold. “Tertiary markets as a whole posted better-than-average gains year-over-year, an indication that capital is starting to chase the high yields in these smaller cities,” according to the RCA report.

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