Economic Forecast: Looking Ahead

Two noted economists evaluate the state of the current market and the shape of things to come.

Ryan Severino
Ryan Severino

On the heels of record growth in the multifamily industry, investors, owners and executives are cautiously forging ahead as we approach the end of the year. It is well-known the level of growth the industry has experienced as of late is not sustainable long-term, but many suspect that market fundamentals will continue to serve in the multifamily industry’s favor.

At this year’s Multifamily Executive conference, Ryan Severino, senior economist and director of research for the economics department at Reis, and John Sebree, first vice president and national director of Marcus & Millichap’s National Multi Housing Group, examined the state of the current economy and their speculations for the future.

John Sebree
John Sebree

Certain fundamentals, like job growth and consumer spending, have kept the economy afloat recently, and experts vary on their predictions of when the good times will come to an end. “We probably have somewhere in the neighborhood of 2-3 years before we have seriously consider thinking about what the next recession is going to look like,” Severino speculated.

Demographics also have had a profound effect on the economy as of late, with the Millennial and Baby Boomer populations dominating purchasing power in most sectors. “Millennials make a lot of money, they spend a lot of money, they lubricate the economy and they keep things moving forward. Many of them spend more money than they make, which also keeps things moving forward,” said Sebree. He added, however, that the Millennial renter boom is closely tied to job growth, as the generation has proven that if they don’t have the money, they won’t start a new household. “Household growth is not only demographics,” Sebree said, “It’s not only the number of people coming of age and moving out on their own; it’s the people who can afford to move out on their own and not live at home with mom and dad or not have Aunt Millie living in the basement.”

Severino added, on a broader scale, that companies are employing the same prudence. “We haven’t really seen companies going out and investing in capital and equipment the way that we’ve seen in the past two or three recoveries, if not longer than that,” he said.

“This is a key reason why you’re seeing a relative lack of investment in the economy. As organizations are looking down the road…they’re thinking longer-term, they kind of know what’s coming… It generally means lower GDP growth, and so if they think growth is going to be weaker going forward, which the data portends, they have a huge disincentive to be investing medium- to long-term,” he added.

All the moving parts in the economy and household demographics suggest changes within the multifamily industry as well. “As we go through this major demographic change… Baby Boomers (are) getting past the age when they don’t want to live in their houses anymore…What it means is more people drawing upon seniors housing, independent living and assisted living facilities,” said Severino.

This is clearly good news for those in the senior living space, but the trend of Boomers moving away from homeownership affects other demographic groups as well, and Severino sees this as a good omen for multifamily. “Going forward, we should expect the home ownership rate to stay in this low- to mid-60 percent range. What we’re going to lose, which we have had to a certain extent over the last 20 years, is what I’ll call marginal home buyers,” he explained. “I don’t think you’re going to see those marginal home buyers return to the market in any meaningful fashion to push that rate up. As a consequence of that, they’re likely to go into renting, which is where we’ve seen that manifest itself over the last 5, 6, 7 and 8 years.”

Sebree added that new regulations have “made it very difficult to build single-family homes, and made it extremely difficult to build single family homes that can be purchased as starter homes by a first-time home buyer.” These shifts in attitude towards home buying mean that Boomers who in the past might have downsized to a smaller home will rent instead, and young people and families who might have been buying their first home will stay renters longer. “I think we’re going to see a lot of people staying in apartments for an extended period of time,” Sebree said. “This is the part of the cycle where historically, people living in (class) B and C properties have been moving out of apartments and buying single family homes, but they don’t have that option today like they have had in the past, so they’re staying in apartments a lot longer.”

While all of these demographic factors are serving the multifamily industry well, the challenge in upcoming quarters will be in providing housing that is fair and affordable instead of taking too much advantage of an unusually robust market. “This is why workforce housing is becoming an issue, because you have a lot of people living in apartments that can’t afford to move out of those apartments,” Sebree explained. “That’s great for apartment owners, but I think that most people who own apartments are somewhat socially conscious and looking at the fact that they’re providing homes for people and they want to help those people accomplish their goals.”