So this is how the Great Recession ends in the multifamily industry? Not with a whimper, but with a bang, and not just any bang, but a screaming eagle, sonic-booming, avenging angel bang that is blasting apartment operators to an unheard of zenith in rent fundamentals. Mark 2010 down as the year of the recovery, and then fasten your seat belts for 2011 and beyond.
With concessions burned off, occupancies high, supply short, and colossal demographic data pointing to consumers entering their age-appropriate renting years (or otherwise disdaining single-family housing), it’s time to push rents. And for most apartment operators, the question isn’t how high will rents go, but how high won’t they go?
With some rent growth predictions for 2011 eclipsing the double-digit mark, talk abounds of rent records being shattered as the industry enters the beginning of the best years multifamily has ever seen. In fact, nary a critic of irrational exuberance or overoptimism is to be found.
“Do I think there are extremely aggressive rent growth assumptions in the multifamily industry right now? Yes, absolutely,” says Encino, Calif.–based Marcus & Millichap managing director of research and advisory services Hessam Nadji. “But for 2011 and 2012, I think those assumptions are justified. Because of the supply–demand dynamics, we are going to have record rent growth over that two-year period. Definitely the strongest performance since 1999 to 2000, and we might even beat that record.”
Nadji’s projections are shared by many in the apartment sector and need little translation. With three years of little new apartment stock developed due to a continuing lending crisis—and existing apartments already at peak occupancy levels—landlords are firmly in the driver’s seat when it comes to pricing rents. Despite the fact that job creation (a traditional metric for apartment demand that sees roughly one unit rented for every six jobs created, according to industry executives) was relatively flat in 2010, apartment absorption soared. Apartment managers who were giving away two or three months in free rent just to get prospects in the door suddenly saw those prospects converting into leases and occupancy numbers not seen since before the recession.