Though the U.S. economy is slowing, the multifamily industry remains somewhat immune from recession and is primed to thrive in the next five to 10 years, according to Linwood Thompson, managing director of Marcus & Millichap’s National Multi Housing Group.
Thompson set out his case for optimism at “AFT’s Annual Forecast for Rental Demand” during the APARTMENT FINANCE TODAY Conference April 7-9 in Phoenix.
Key economic indicators suggest the U.S. economy is in a recession—more than 230,000 jobs were lost in the first three months of 2008, and gross domestic product is forecast to drop 100 basis points to 1.2 percent in 2008.
But the slowdown is affecting markets differently. Many Texas markets, such as Houston, Austin, and Dallas, are forecast to see strong job growth of around 3 percent this year, while the outlook is less sunny for stalled local economies like Detroit and Cleveland.
And the apartment industry is primed to weather the storm. “It’s the multifamily fundamentals, and not the macro economy, that will drive our business,” Thompson said. “We’ve seen oil climb over $100 a barrel, the [commercial mortgage-backed securities] meltdown, and the singlefamily housing bubble bursting. But ultimately, it’s not enough to impact the multifamily business.”
The reason for optimism? First, the supply and demand of apartments is stable and favors increasing rents and appreciation. Over the last seven years, the industry has added about 100,000 market-rate units annually, which is just 1 percent of the national stock. In contrast, Thompson forecasts demand for 400,000 new units per year for the next 10 years.
This constrained supply—driven by increasing NIMBYism and high land and construction costs—should translate to national rent increases of between 3 percent and 3.5 percent, and a national occupancy rate of 94 percent, for 2008.
Demographics tell the tale. Thompson expects 5.5 million echo boomers to enter the rental market over the next five years. And immigration should account for another 12 million increase in population out to 2015.
“In a typical recession, supply exceeds demand, occupancies are decreasing, and effective rents are decreasing, and we don’t have that taking place in the apartment industry,” Thompson said. “I would suggest that, instead, we’re in a period of recalibration.”
Visit www.housingfinance.com to read more about the conference. Excerpts from the Industry Leadership Roundtable discussion at the conference will be published in the June issue of APARTMENT FINANCE TODAY.