The recession is apparently over.
For apartment owners and investors nationwide, that good news was delivered Wednesday morning at the Multifamily Trends Conference, held in conjunction with the Pacific Coast Builders Conference in San Francisco. “With three quarters of positive GDP growth, we have turned the corner,” said Asieh Mansour, chief economist and strategist for San Francisco-based RREEF, who sat on the lead-off Economic and Apartment Supply/Demand Forecast panel with Dallas-based Axiometrics president Ronald Johnsey and moderator Hessam Nadji, managing director of research for Walnut Creek, Calif.-based multifamily brokerage firm Marcus and Millichap.
According to Mansour, major research firms including RREEF have been upgrading their 2010 economic evaluations virtually across the board. “We’ve had an 18-month recession, which ended in June. We’re not out of the woods, but we are upwardly revising our forecasts, and it’s not following any rubber band theory of a hard pull down with a quick snap back. In contrast, I think the recovery will be very fragile, at 2 percent to 3 percent growth annually."
Mansour pointed specifically to increases in temp hiring and the length of the workweek as leading indicators of future job growth, which bode well for multifamily real estate, particularly when coupled with an easing in the credit and CMBS markets.
Based on an Axiometrics survey of some 50,000 apartment communities across the country, Johnsey said positive recovery in the multifamily sector is already being felt across a majority of markets. “What we have seen between January and April of this year are just incredible numbers,” Johnsey said. “We’ve seen effective rent growth of 2 percent, and typically in the first quarter, you see rental rates and occupancy levels go down, so these are exceptional numbers at the national level. Do you straight line [that growth vector] across 2010? No, but maybe you can double it. Any way you look at it, the results are astounding.”
Johnsey also pointed anecdotally to lower turnover rates and move-outs for homeownership, particularly among publicly reporting multifamily apartment REITs seen as apartment industry and rent fundamental bellwethers. An Axiometrics comparative analysis of first quarter demand by floor plan from 2008 and to 2010 also shows what Johnsey called an “unwinding of the double-up market.”
In addition to the double-up/double-down phenomenon, and the prospect of 70 million Echo Boomers now entering their peak rental years, Nadji noted an additional 2.2 million people who had moved in with family between 2005 and 2009. “As the economy improves and that number declines, it should unleash short-term demand. It might even be part of the strength that we saw in the first quarter, the release of some of this pent-up demand into the marketplace.”
Improvements in 2010 rent fundamentals are likely to lead to a quicker than expected resumption of multifamily development opportunities, the panel agreed. “Short of a rock hitting the earth or a Lehman No. 3, developers want to start as soon as they can,” Nadji said.
Johnsey noted that interest in development will run in tandem with positive rent growth and move-in occupancy, which could reduce vacancies to 6 percent by 2012. “Especially considering how long it is going to take to deliver supply, I am absolutely bullish [on multifamily fundamentals,]” Johnsey said.
Panelists did caution that any recovery hangs on the ability of the economy to create jobs that lead to renter household formation, and that the unemployment picture remains dire, with Johnsey noting a 25 percent unemployment rate among high school graduates without college educations, while Mansour explained to attendees that a better measure of labor stress is to include part-time workers and those who have stopped looking for employment, which pushes unemployment overall closer to 19 percent.
“Still, multifamily is one of our favorite sectors across real estate in terms of recovery fundamentals,” Mansour said. “It’s certainly the first sector in terms of demand recovery.”