Right after lunch, the attendees at Tuesday’s Urban Land Institute (ULI) 2010 Washington Real Estate Trends Conference were asked a number of questions. Among them: If you had money to put in any one real estate asset class, which one would it be? Almost three out of every four attendees (73 percent) answered multifamily.
The sentiment wasn’t an isolated occurrence. Throughout the day, a number of speakers highlighted market conditions that could make 2011 and beyond a good time to be an apartment owner. But apartment owners are, by no means, out of the woods.
Future Casting
One key proponent of that idea was Ivy Zelman, CEO of Zelman & Associates, who came to fame for her knowledge of the single-family market and forecasting the subprime collapse.
Zelman still sees problems in the single-family market with foreclosures potentially causing more downward slides in pricing. But countering that, she said that builders were actually able to move prices upward in some markets. Many of their buyers have been qualifying because they can get interest rates at less than 6 percent. If rates tick up, builders tell Zelman they may lose those buyers.
But that’s only one reason apartment owners may see more renters. With Baby Boomers trapped in homes they can't sell, as well as with reduced liquidity and a return to more normal underwriting standards, retail demand could grow.
“People who are forming households might look at renting as a better opportunity,” Zelman says. “I’m bullish on the rental industry.”
And Zelman doesn’t think the GSEs, which are providing the bulk of multifamily financing, will be going away anytime soon. “I think we will be talking GSE reform for a long time,” she says. “Things take a long time in Washington.”
Clouds Remain
All of this good news is countered by some issues. Douglas Poutasse, executive director of the National Council of Real Estate Fiduciaries, pointed out a startling fact—the 2000s were the first decade with zero growth since the 40s, losing 850,000 jobs on the whole. That wasn’t good news for apartment owners. “Vacancies in apartments, retail, and industrial will be worse than the last real estate recession of the early ’90s,” he says.
Zelman doesn’t think the jobs needed to improve those numbers will come quickly. “We will be challenged to have a fast recovery, and the economists who predicted a fast recovery will be, unfortunately, disappointed,” Zelman says.
But citing some overly optimistic Economy.com data, Poutasse made the point that the jobs needed to push rents may soon be coming. In fact, he thinks apartments may be close to their peak in vacancies. And that could put a lot of the 20- to 30-year-olds, who have lost jobs over the past couple of years, back into their own households.
“[Economy.com's] forecasting modest growth this year, but strong growth in 2011 and 2012,” he says.
Still, others don’t know what will really happen with Gen Y. James Chung, president of Reach Advisors, a Boston-based marketing strategy and research firm focused on emerging shifts in how Americans live, says he sees a lot of marketers betting on Gen Y. “But they’re starting their careers in very challenging times,” he adds.
If they do start those jobs, multifamily owners seem to have the upper hand… for now. “The return to urbanism is interesting,” says Brooke Warrick, president of American LIVES, a market research firm specializing in psychographic market segmentation. “People want connection. If there’s a social fabric out there, people will figure it out.”
But Chung warns that Generation X wanted that as well. Demographers thought that would set the stage for an urban revival, but economic concerns won out when they started families. “They didn’t have to pay for private schools before,” Chung says.
