The idea of the bifurcated market came up at lot at the Apartment Finance Today Conference in Las Vegas. Despite a robust national recovery, from an equity and debt perspective the apartment industry is still a market of “haves” (the “sexy six” markets) and have nots (many smaller locales around the country). That also happens to be the case for the economy in general.
“We’re seeing a bifurcated economy right now, on a slow path but [still] a lot better positioned today than it was a year ago,” said Mark Vitner, managing director of Wells Fargo Securities.
That said, Vitner said job growth is much more broad-based than people realize, with Atlanta, for example, going from having the worst unemployment in the country to being the second-strongest market from that standpoint. Florida is also doing much better.
“We’ve added jobs in the private sector, but only in four of the lowest-paying industries of anything we track by the hour,” Vitner said. “The net result is no real income growth. My concern is fundamentals are improving, but income growth is so modest that I get nervous. From a market-tightness standpoint, I don’t know what ability there is to raise rents if there’s no ability to generate income to pay those rents.”
Ryan Severino, the senior economist for Reis, isn’t quite that pessimistic. “I think everyone is well aware that we’ve seen a spectacular turnaround, and a lot of the reason for that is we’ve seen the unbundling of doubled-up households,” he said.
Severino said Class A rents declined faster in the recession, while Class B or C rents held up relatively well. After the recovery, Class A jumped. Because of the difference in markets, landlords won’t be able to push rents all around. “The kinds of jobs being created—it’s not a uniform distribution—that doesn’t mean landlords will be able to push rents universally,” Severino said.
Vitner doesn’t see an overbuilding issue “for years,” and, instead, thinks the biggest threat to landlords is the economy faltering again. Severino also discounts overbuilding as being a real problem. “I don’t think supply growth is the grim reaper hanging over the marketplace right now,” he said. “On a metro-by-metro basis, [construction] growth is coming from a very low base. Demand has been at a good place for the past few years. In 10 years, that changes.”
Jay Parsons, national market analysis manager for MPF Research, agrees. “There are a lot of fears about oversupply; maybe it’s not that severe quite yet,” he said.
With three and a half million jobs missing since the recession, Vitner sees the potential for another credit downgrade from Moody’s. In fact, he doesn’t see an impact from the recovery coming until 2014 or 2015. “I think, seasonally, you are going to see that unemployment will be higher in August,” he said.
Severino says things are trending well, but that there is still the potential for outside forces to interfere. “If the economy were left to its own devices, the forecast would be OK,” Severino said. “This is still a fragile economy. We haven’t had this since the 1930s. Risks are incredibly unpredictable and they tend to be random. We run the risk that we’ll face an outside impact that can’t be modeled or predicted.”