Greg Willett, M/PF Research's Vice President of Research and Analysis
M/PF Research Greg Willett, M/PF Research's Vice President of Research and Analysis

In the current economic climate, everybody wants the facts, and Carrollton, Texas-based M/PF Research's vice president of research and analysis Greg Willett is happy to oblige. Willett sat on two panels at the recent Pacific Coast Builders Conference before heading out this week to the National Apartment Association’s Educational Conference. MFE Senior Editor Chris Wood caught up with Willett in a breather between PCBC and the NAA show for an exclusive download on rents, top markets, shadow renters, Gen Y, and more.  

MFE: Are rent conditions worse than people are letting on?

WILLETT: I think rents are pretty transparent. Everyone has their rents on their Web site, and certainly consumers are pretty smart and know what to expect when they come in the door. No one is hiding what their effective rents really are. And consumers are more aware of the impact of concessions, too, but concessions are somewhat going away as a standard business practice. Internet transparency and revenue management have been important drivers of that disappearance. Another big factor is that a lot of companies are targeting younger customers, and there has been significant research showing that that demographics does not like the “on-sale” concept: They just want to know what the price is, and they want it presented in a very straightforward manner.

MFE: Does that mean you believe in the Gen Y demographic?

WILLETT: I think it is different than what we have seen before. Mobility is an incredibly important thing for this group. Step one is that they have to get jobs, and we are not quite there yet, but it will be interesting to see their patterns of behavior as we move beyond that point. There’s a lot of talk about debt and deleveraging and how everyone is going to be interested in controlling their spending moving forward. But with Gen Y, I don’t know if that is entirely true. Given that Gen Y didn’t have any money to lose during this cycle, perhaps their spending habits are not going to be any different from what we have seen from young adults in the past. What they are willing to spend money on might be different, but I do think they will be willing to spend a lot more than they are being counted on for at this point.

MFE: What is your sense on where the shadow market is headed?

WILLETT: Well, the Florida markets were pounded. A lot of the buyers there were looking for investments rather than purchasing for a primary residence, and they ended up putting them out for rent at prices that do not remotely give them positive cash flow. Now all of that is in foreclosure, but I wonder if we might just be in a sweet spot where that product is not on the market right now. A lot of those condos are being bought by investors again. Does that mean it comes back into the shadow market pool? We are thinking that some of it does. That’s one thing that can slow the momentum in Florida as we move towards recovery. We are going to have to watch that, as we still do not know what is going to happen with these units.

MFE: What are your top markets right now?

WILLETT: Our top pick, even though it is down right now, is the San Francisco Bay Area. We feel it will make the biggest comeback of any area. But I think high job growth and typically low barrier-to-entry Sunbelt markets will be the surprises in the next cycle. Atlanta, Phoenix, Ariz., and Texas are all high employment growth areas that normally struggle because of new supply. Well, we are not going to be adding new supply this time. Those markets are never at the top, but I think they are going to be in the next cycle. I think job growth will stimulate considerable demand at a time when the industry is delivering far less product into those markets than it normally does. The danger is that these are all single-family affordable markets, and you could again lose a lot of renters to purchase in the next cycle.

MFE: How can apartment operators offset move-outs for purchase?

WILLETT: We’re all worried about losing some renters to purchase in the next round, but that’s actually what is going to help turn this economy around. You need to be glad about seeing move-outs in your properties rather than trying to fight it, and I do think there are some markets where rents are coming down because operators are trying to prevent that from happening. Let it happen—in the long term, it will be much better if we can get the economy moving and see significant job creation.

MFE: What are the relative market challenges once recovery begins?

WILLETT: A big question mark is when do we get to the stage where development is justified again? When we do, what is the product going to be? There are some real challenges to every niche. Given costs, we will still be in a situation coming into recovery where only high-end, top-of-the-market product pencils out. But is there any demand for that? If we have cut rents so much in this cycle, how long will it be before we can get deals to pencil out at lower [product types]? Who will we build for in the next cycle? What do they want? What’s the right product? There seems to be a barbell in demand between Gen Y and aging Baby Boomers. Speaking of the Boomers, there is another assumption that they are not all going to age in place. There are so many of them that it does not take a big share of the total to create some significant demand, but there’s likewise no sizeable evidence yet that they are going to opt for multifamily product.