The arrival of the Gen Y cohort has been one of the most eagerly anticipated events for apartment owners in many, many years. But when the economic collapse hit and Gen Yers lost their jobs, things changed. As of June 2009, workers under 30 had sustained half of the net job losses.
Despite this, in the past year, it appears that the time apartment owners have been waiting for is, at least, starting to arrive. In the past year, unemployment for the 25- to 34-year old cohort has fallen from 10.7 percent last fall to 9.9 percent this year.
“The pace of hiring among young adults under 30 has reportedly added its strongest pace since the mid-'80s,” said AvalonBay Communities' CEO Bryce Blair in a conference call transcribed at SeekingAlpha.com. “As this age group tends to be primarily runners, it does explain some of the unbundling the apartment sector is benefiting from, while the absorption of apartments during the first half of this year was at its highest [point] in over 15 years.”
Group Dynamic
While the Gen Y group is clearlyshowing signs of improvement, the 45- to 54-year-old cohort saw their unemployment levels flip flop from 7.8 percent last October to 7.4 percent in February and back up to 7.8 percent this October. For those aged 55 and over, the unemployment rate went from 5.3 percent in the beginning of 2009 to 7 percent in October 2009. Now, it’s at 7.3 percent.
Ryan Severino, an economist with New York-based Reis, sees why employment recovery seems to be rising in the younger cohort. “If you don’t have the responsibility or the salary expectations, and you’re not tethered to a family or to a mortgage, then you can be flexible and take advantage of those job opportunities much more easily than someone older,” he says.
That’s one of the reason why the vacancy rate fell from 8.0 percent in fourth quarter of 2009 to 7.1 percent as of the third quarter of 2010, according to Reis. “What you see among that prime renter cohort is an increase in job numbers,” Severino says. “I think that’s been why you have seen apartment stats look as favorable as they have the last couple quarters."
Limited Upside
Despite this good news, Reis isn’t exactly forecasting astronomical rent growth in the next couple of years. Despite occupancies going up, the data provider only forecasts a 2.3 percent increase in asking rent in 2011, followed by 2.4 percent increase in 2011 and a 2.8 percent in 2012.
Sure, after the past couple of years, apartment operators will take that. But there is some concern that job growth among the 20-somethign cohort won’t be enough to really push rents. “I think it’s going to be difficult to have wage growth, and so people, as they get jobs, will rent an apartment, but they’re going to remain price-sensitive, I think,” said Terry Considine, CEO at Denver-based AIMCO on the company’s third-quarter conference call.
Severino agrees. “They are young, and they don’t have a lot of leverage in their careers,” he says. “A lot of these jobs being created aren’t the investment banking or consultant jobs of five or 10 years ago. I don’t think the economic recovery will be that great or create enough jobs where you’ll have landlords feel comfortable pushing supernormal rent increases. I do think you’ll get rent increases, but I don’t think there will be 6 percent to 10 percent rent growth on average nationally.”
So basically, unless there’s job growth among higher paid earners in your market, don’t expect astronomical rent growth. “The economy could surprise, but I don’t see how they can push rents on these people,” Severino says. “Maybe they can push it at the uber luxury units for investment bankers in New York and San Francisco. But in the aggregate? I think its going to be difficult.”
Severino could be right, judging from Chicago-based Equity Residential’s third-quarter conference call. Fred Tuomi, the president of property management at Equity, said that the company is actually seeing a waiting list for its penthouse units in New York. It’s also seeing similar trends in Boston and Washington D.C.
“The premium pricing which we add for premium units that have views [and] other amenities has recovered fully in those markets,” Tuomi says. “So I feel very good about the ability to rent at the high-end.”
But outside of Washington, D.C., New York, and Boston, the jury is still out on rent growth in high-end units. And it may continue to be until more high-paying jobs emerge.
