SAN FRANCISCO: How great is it to be in the apartment industry right now? “I think the next three to five years will be the best that our industry has ever seen,” said Multifamily Trends conference chairperson and San Francisco-based BRE CEO Connie Moore at the Pacific Coast Builders Conference (PCBC) on June 23. “I don’t think any of us are naive enough to think that every single person is going to be a renter, but people are beginning to think about housing as a consumption good, not an investment.”
Moderating a keynote panel on the economic outlook, Moore noted that the 3 million young adults who elected between 2005 and 2010 to remain with family rather than strike out on their own are beginning to come back to the rental pool, adding to the 75 million-strong Generation Y demographic that is expected to show a higher propensity to rent and is already powering job growth coming out of the recession. According to Moore, 65 percent of the new jobs created since the recession were filled by workers in the 25-34 age cohort.
Demographics beyond Gen Y also support a long-term growth trajectory to the apartment industry, according to Mark Obrinsky, vice president at the Washington, D.C.-based National Multi Housing Council. “Over the longer haul, we have a growing population, with the country producing the equivalent of California’s gross population every 12 years. We also don’t have a baby bust in the picture, as there is a steady level of births following the Echo Boomers,” said Obrinsky, who joined Moore and Berkeley, Calif.-based Rosen Consulting CEO Kenneth Rosen on the panel. “So in the apartment world, things are looking much better. Most markets are seeing higher rents, improving vacancies, or both. Preliminary 2011 second-quarter data suggest that vacancy will go below 6 percent, and on the rent side, growth may have been up 1.4 percent from the first quarter, with net absorption also faring extremely well.”
Still, speakers at the Multifamily Trends event (held in conjunction with PCBC since 2002) cautioned that recovery in the apartment sector is still in its nascent stages and will depend heavily on solidity in what has been sputtering macroeconomic growth. “Multifamily is great, but the economy has some other issues, and we are in a soft patch after strong growth last year,” said Rosen. “Consumer confidence had fallen off some, and unemployment has spiked up in May. It seems to be a stop/start economy of alternating strong and weak quarters. We’re growing gross domestic product at about 2.4 percent. In a typical recovery, we would have 4 to 5 percent growth. Clearly, that’s not going to happen this time. It will be a subdued recovery.”
According to Rosen, the country added about 100,000 jobs per month in 2010, and his firm expects job growth of 200,000 per month in 2011. Market watchers would like to see improvements to those numbers before ringing a rally bell. “It is still very early, but we have not seen the job growth or the wage growth that will be key to driving this recovery over the long term,” said Fannie Mae vice president Paul Lewis, who sat on a capital markets panel with New York City-based Intervest National Bank director of loan production Marshall De Wolfe and Washington, D.C.-based National Association of Home Builders (NAHB) senior vice president Sharon Dworkin Bell. “You are seeing true upward movement in effective rents, though,” Lewis said. “And it is encouraging to see the recovery in market fundamentals.”
Bell noted that NAHB expects the growing apartment supply/demand imbalance to continue to play into the hands of apartment owners until multifamily development returns full bore. “Our forecast for multifamily starts is 123,600 this year, with another 146,000 in 2012,” Bell said. “If you are an apartment developer, we definitely need your product. There is going to be a supply/demand imbalance for some time, and if you own apartments, it is going to be great.”
While panelists noted that continued price depreciation in the single-family housing market could attract renters back into the ownership sector, worry of that trend significantly affecting multifamily rent fundamentals was muted at best. “Single-family sales are still going nowhere,” said Obrinsky. “Sales have been in the tank since the bubble burst. Existing homes have seen some juice from REO sales, but the first-time home buyer tax credit has played itself out, and the homeownership rate is still falling. It peaked at 69 percent and has since fallen 300 basis points, and I expect it to go to 65 percent or below.”
The overhang of vacant single-family homes continues to weigh on stronger improvements to both single-family sales (due to oversupply) and multifamily rent fundamentals (in markets where those units compete as rentals). Moore questioned whether that housing stock might ultimately better suit both sides of the housing industry and the economy as a whole if it were allowed to fall into obsolescence. “Are those vacant houses in places where people want to live anymore?” Moore postulated. “Particularly with gas prices, perhaps those vacant homes should just be bulldozed and returned to farmland.”