Back in 2016, I queried CRE executives about where they thought we were in the real estate cycle. Most of the answers I received were that it was either the top or bottom of the ninth. In 2018, I posed the same question and responses ranged from bottom of the 13th to the seventh inning stretch of a double header.
In 2020, I’m starting to think I’ve been using the wrong metaphor all along.
A young analyst in my office is a surfer and has been teaching me all about this incredible sport. He told me that this year something special has been happening across the Pacific. Rather than one perfect storm, many disparate storms have formed around the ocean thousands of miles apart at just the right time. These storms generate massive swells that have converged and descended upon a beach in Maui to create quite literally the perfect wave.
Apparently, it’s an epic time to be a big wave surfer.
It’s also an epic time to be a multifamily investor. Distinct yet important events have occurred to create the perfect wave for the multifamily industry, which has seen unparalleled growth throughout the last decade.
On a macro-economic level, year-over-year unemployment is down 30 basis points to a half-century low of 3.6 percent, there have been 112 consecutive months of job growth, wage growth is up 3.7 percent, the 10-year Treasury is under 1.6 percent, there is less federal regulation and the U.S. is negotiating better trade deals that are expected to further stimulate the economy.
On an industry specific level, a tight housing market along with shifting demographics has resulted in a decline in home ownership from 70 percent before the Great Recession to 65 percent today. The high costs and barriers to entry in many of the top MSAs are stifling much needed non-luxury development, causing overall vacancies to decline. Even with 280,000 new apartment deliveries nationwide, the occupancy rate rose 40 bps to 95.8 percent in 2019 with Los Angeles and New York leading the way.
Furthermore, Baby Boomers, the generation that created more wealth than any other in human history, are now bestowing this wealth to their heirs, creating an entirely new pool of buyers in search of capital preservation and the relative long-term safety of apartment buildings. There is more dry powder available today than ever before.
Evidently, surfers call this type of wave a screamer.
But how long can we hold the line? Can we make it out of the barrel or will the wave come crashing down upon us?
Despite overwhelmingly positive economic metrics, there is a lurking affordability crisis in America, where two in five adults are a roof repair or an unforeseen doctor bill away from insolvency. Housing costs, health burdens and mounting student debt are the main culprits of this financial fragility. These issues will most certainly be at the forefront of the national conversation as we move full steam ahead into election season.
Where do we go from here?
While the luxury market remains healthy for now, as rents in this segment begin to flatten and affordability remains an issue, expect to see more focus on developing, repositioning and operating workforce housing. If inflating housing costs are not curtailed, nationwide rent control could eventually become a reality.
Big wave surfing is not only physically grueling, but it also takes a certain mental determination to persevere. If we as a country are determined to address the widening affordability concerns and shred this economic wave, the multifamily industry will continue to thrive.
I suppose then, I’ll have to come up with a new metaphor two years from now.
Mark Ventre is a senior vice president at Stepp Commercial, a Southern California-based multifamily brokerage.