After what some observers would call a rebound year in 2014 (while others characterize it as the continuation of a good run), 2015 looks to be yet another year of growth for the apartment business.
But there are some clouds on the horizon that could trip the business in the months ahead. Here are three things economists think could be potential hiccups as the year plays out:
-Oil Prices
Most observers paint lower energy prices as positive. At worst they’re something that will plague Houston and possibly some of the other markets in Texas.
“They’re good for national multifamily, but bad for Texas multifamily,” says Ryan Severino, senior economist and associate director of research at Reis.
But Texas—which saw 20 percent of the nation’s completions last year, and represents 20 percent of all ongoing apartment construction this year—plays a large role in the national market. “You slow Texas a lot, you really impact those national numbers,” says MPF Research Vice President Greg Willett.
Willett thinks the positives of lower oil prices may be overplayed in the national media, especially for more affluent renters.
“I struggle with the concept that economists are putting out there that lower energy costs are good a strong positive for the economy because we’ll have more consumer spending,” Willett says. “That’s the conventional wisdom. At the same time, oil price volatility is a global geopolitical disruption that, so far, has impacted the stock market negatively. Does it counter your $20-a-week savings on gas prices if you’re losing wealth in the stock market? I’m not sure lower energy prices boost the economy to the degree anticipated.”
-Increased Mobility
Mobility can mean a lot of things, but in terms of wandering renters, it’s a threat to landlords. “If that [mobility] kicks up, that can change things a little bit,” Willett says.
Mobility could mean finding a better deal down the street as their rent rises. “Some markets are becoming incredibly expensive,” Severino says.
It could mean renters deciding to go out and buy their first homes, as Fannie Mae and Freddie Mac reduce loan-to-value requirements and the FHA reduces premiums.
“Rents are rising at 4 percent, which is twice the inflation rate,” says Lawrence Yun, chief economist and senior vice president of research at the National Association of Realtors. “I think that will begin to get the attention of financially qualified renters to seriously consider home buying.”
Because, ultimately, Yun contends that many of these renters want to be owners. “The surveys consistently shows that Millennials want to be owners,” he says.
While apartment renters could buy existing homes, Jay Denton, vice president of research at Axiometrics, doesn’t see a major threat from new home builders, though companies like D.R. Horton and LGI Homes are selling entry-level models.
“Single-family could pick up, but that will be a delayed impact because it will take new home building, as existing stock is already full,” he says. “There aren’t spec homes out there waiting for renters to jump into them. It takes time for companies to decide to build those homes, and then actually do it.”
-New Deliveries
Out of all of the threats that could face the industry, Severino sees one thing as really standing out. “I would say the first is construction, which is really ramping up,” he says.
Others agree. Even if renters are filling those new units at a healthy pace, the overall effect of so many new units will show up on the bottom line.
“Supply is growing rapidly,” says Ryan Meliker, managing director of equity research, REITs, and lodging for New York-based MLV & Co. “Do I think demand will be able to absorb that supply? Yes I do. But it doesn’t change the fact that if I have supply growth that high, even if demand is absorbed, you’re essentially looking at slower NOI growth.”
And, if the economy slows down, absorption of those units could get even more difficult. “The economy and any threat to it would be an issue on the revenue side,” Denton says.
While supply is a concern, Willett points out that not all of the units in the pipeline get delivered. With labor and materials concerns, and local government inefficiencies, he said only about 70,000 of the potential 90,000 units came online in the fourth quarter. And, that has been the trend for a while.
“It really seems like every quarter you push out roughly the same percentage [of completions] over and over again,” Willett says. “You would think at some point it would catch up, but it hasn’t.”
