Call it cautious optimism. Unclear but not dire. Choppy. Mixed. Whatever you call it, the economic outlook is, at best, uncertain. So concluded a panel of powerhouse economists at the 2010 Apartment Finance Today Conference in Fort Lauderdale yesterday.
Here’s a look at their key conclusions and takeaways.
Dr. Richard Green: Renters Will Evolve as Households Change
Thanks to the Great Recession, households have dramatically changed, said Dr. Richard Green, director of the USC Lusk Center for Real Estate. “The types of families today are different,” he said, referring to the increase in Echo Boomers and multigenerational households.
In addition, he points to household balance sheets, as well as the incomes and credit scores of renters. “The average 50-year-old today has a mortgage that is twice his income. Twenty years ago, that figure was equal to the mortgage,” Green said. “This means that when that individual retires, he will have to move. And where will he move? Into an apartment.”
What’s more, Green continued, the average income of apartment dwellers in 2007 was just under $30,000, which yields just below $800 per month available for rent. Couple that with FICO scores that have been decimated thanks to foreclosures and defaults on the credit reports of former home owners, and the ability of renters to pay rising rents in a shrinking economy and state of perpetual unemployment has been significantly reduced.
“There needs to be greater attention paid to rental housing now,” he added. “The housing myth has been shattered.”
Dr. Sam Chandan: Mortgage Capital Business Will Take Time to Recover
The big concern that Dr. Sam Chandan, global chief economist and executive vice president of Real Capital Analytics, sees in the finance sector today is that no one right now is still entirely confident in expanding their exposure in the apartment industry. The reality is that the GSEs have reported plummeting net income, and defaults across the country continue to rise.
Despite this, the mortgage industry has simultaneously injected some stability into the market. The Fannie Mae and Freddie Mac deals of today will continue to look good down the road. “Loans made in 2006 and 2007 were garbage, but loans made at the more conservative underwriting standards of the past year and a half are quite good,” Chandan said.
In addition, there are signs that this is changing as some life insurance companies and a number of CMBS providers are showing greater interest in apartment investment. Even banks are acutely aware of the market they’re operating in and making adjustments for the environment. “Papers call it ‘extend and pretend,’ but there is not one bank that is not keenly aware of the quality of their portfolio,” he said.
Greg Willett and Ryan Severino: Some Local Markets Bode Better Than Others
Operating fundamentals in the first quarter of 2010 boded well for the apartment industry, with occupancies holding steady and rents increasing slightly in a number of markets, agreed Greg Willett, vice president of research and analysis at M/PF Yieldstar, and Ryan Severino, an economist at Reis.
Willett pointed to markets such as Washington, D.C., Boston, and Philadelphia as amongst the most stable in the country in terms of occupancy levels. Going forward, he also believes that Florida, San Diego, Raleigh, N.C., Austin, Texas, and Denver are poised to have a strong recovery going forward thanks to their job growth forecast, continued premiums to buy versus rent, and a young demographic makeup.
“Southern California is the most confusing spot in the entire country right now,” Willett added. “The economy is consumer-driven, but they may not be able to generate the jobs they need to sustain a recovery in apartment fundamentals.”
Severino, meanwhile, forecast that through 2014, the markets where rent growth will outperform the United States include Oakland, Calif.; San Diego; Orange County, Calif.; New York, suburban Virginia; coastal New Jersey; Sacramento; Memphis, Tenn.; San Jose, Calif.