Apartment REIT second quarter results and MPF Research data suggest that the corner has been turned in the rental market (1). REIT’s and analysts alike have given very positive outlooks and the REIT’s have even started to move forward on new development projects. The supply-demand fundamentals are strong in the coming years with positive demographics in the prime rental ages (the Y generation is 80 million strong), high college graduation rates, and virtually no new completions or construction(2). Equity Residential’s CEO even goes so far as to say the apartment industry is already entering the best years the apartment industry has ever seen(3).
If you are an Apartment REIT with access to capital, gearing up for new development (as it looks like they are doing) is probably a good strategy. After all, it usually takes 12 to 18 months to start delivering new apartments and the supply side will continue to be constrained. The rest of the industry is still faced with hurdles regarding access to capital and the negative feedback loop regarding job growth, the shadow market, and immobility.
In the past, job growth has been highly correlated with occupancy and rents and yet recent improvements in apartment fundamentals have not followed the trend in government reported job statistics. Why do Apartment REIT results conflict with the job reports? I haven’t seen a solid explanation yet.
There are a lot of factors in the current economy that were not present during previous cycles that may explain some of it and there is some skepticism regarding the government’s statistics. Also, there is a lot of “noise” in the job statistics from events like the census, the oil leak, seasonal adjustments and under-reporting of small businesses. National statistics may not translate well into neighborhoods where there could be pockets of improvement either. Anecdotally, young renters are likely highly motivated to find ways to get out of their parents house, reduce the doubling and tripling up that they have done over the past few years or form their own household.
In the past, home ownership rates were highly negatively correlated with the number of renters. As home ownership rates continue to decline today(4), there are differing opinions about what that means for the Multifamily Industry. The single family market continues to implode and concerns remain over what that means for the economy at large, future job growth and the shadow market. Strategic defaulters remaining in their homes rent free, vacant homes that have been foreclosed, renters wary of homes that could go into foreclosure, and a frozen market where homes are more illiquid than ever (and people are more immobile than ever) are all factors that are difficult to analyze. The most obvious impacts of continued troubles in the single family market are the continuing negative effect on capital availability and concern we will be dragged into a double dip recession.
So, what does it all mean for new multifamily development? It looks like the REIT’s may take advantage of their access to capital to get a head start on what looks to be promising years ahead. Much of the rest of the industry is likely to be mired in the mud on the side of the road until the rents improve significantly, capital becomes accessible, and they can move forward "opportunistically". There will be some though, who have followed distinct strategies and positioned themselves well to take advantage of the transformational change that is occurring - and will be able to "dip" their toes into new development along with the REIT's.
One last statistic to consider: Architectural Billings for multifamily have dropped from December 2009 through May 2010 as follows 51-50.1-47.3-47.3-45.8-46.9 with anything under 50 indicating a decrease in billings. Maybe, there isn't much to read into that as the only ones with access to capital are basically REIT's, and mutifamily billings for architects are generally pretty lumpy.
Related Articles:
(1) Wall Street Journal article: http://tiny.cc/77xg3
(2) CEL Associates has demographics at http://tinyurl.com/252v9ro
Harvard State of the Nations Housing 2010 http://tiny.cc/6eemy
(3) Equity Residential CEO interview at http://tiny.cc/x1x3i
(4) The Housing Collapse Intensifies: http://tiny.cc/12b0z
(5) Apartments Stage a Comeback Reis research supported http://tinyurl.com/295xk26
