SPECIAL REPORT: Negativity on Economic, Investment Outlook Is Evident in NMHC Conference Sessions

By Keat Foong, Executive Editor Boca Raton, Fla.—Speakers at the National Multi Housing Council’s (NMHC) Apartment Strategies Conference held here contemplated the state of the economy, apartment industry and investment conditions. There is “a lot of anxiety and insecurity out there,” acknowledged Douglas Bibby, president of NMHC, at the start of the one-day conference. However, he noted the industry is also witnessing “some very strong tailwinds behind us.” Economists at the conference’s first session seemed to agree that the U.S. economy is likely to tip into recession this year. “As to the question of whether there will be a recession, frankly, I don’t see how that can be avoided,” said Mark Obrinsky, vice president of research and chief economist at NMHC. Obrinsky cited the housing downturn and the turmoil in the financial markets as major causes of any recession that will occur in 2008. He said the financial markets are “in the worst crisis” since the 1980s and that the housing downturn may be “the most serious” since the Great Depression.  The economists agreed, however, that any economic slowdown will probably not be long. Obrinksy said the economy will likely see two or three quarters of slower growth before it is on the upswing again by the end of 2008. “It is the consensus view that [the slowdown] will be fairly brief,” agreed G. Ronald Witten, president of Witten Advisors.  Greg Willet, vice president, research and analysis at M/PF YieldStar, was one economist at the conference who expressed a dissenting view with regards to the occurrence of a significant economic slowdown this year. “”We see 2008 as being pretty positive,” he said.  Conference speakers expressed more confidence about the health of the apartment industry and apartment fundamentals, citing strong demographic factors. They also noted that all-in borrowing rates remain low and there is no real credit crunch, though underwriting has tightened and loan dollars have been reduced.  Nevertheless, there may be a slight slowdown in the apartment market this year, as a result of slower job growth and the shadow inventory of for sale housing being placed on the market for rent.  Hessam Nadji, managing director, research services at Marcus & Millichap, predicted that apartment vacancy rates will be flat in 2008 and that rent growth will decline from 4.5 percent in 2007 to 3.5 to 4 percent.  As far as the apartment investment market, Linwood Thompson, managing director of the National Multi Housing Group at Marcus & Millichap, said this is the first in seven years that he is predicting an increase in apartment cap rates.  And Craig Leupold, president of Green Street Advisors, argued that apartment assets may be overpriced and said that “as much as 20 to 25 percent correction in asset values may be in the offing.”  At an “all-star” panel discussion, industry movers and shakers expressed both optimism and pessimism on the outlook for investment conditions, but they seemed to agree that the apartment industry will remain sound.  Doug Crocker, chairman and chief investment officer of Transwestern Multifamily Partners LLC, said he is a “major bear” and believes that there will be a recession. Nevertheless, he said the apartment industry is in “phenomenal shape.” “The industry is phenomenally healthy,” he said.  Gary Kachadurian, chairman of Apartment Realty Advisors, took a more moderate view and said that this is a normal part of the business cycle.  John Bartling, managing partner of AllBridge Investments LP, said he thinks the economy is headed toward stagflation. He mentioned the falling dollar and said that capital will be taking flight to other markets such as India and China.  Neververtheless, Bartling said that “our industry is healthy.” Ron Terwilliger, chairman and CEO of Trammell Crow Residential, suggested some of the pessimism may be overblown. “There is a lot of fear out there that did not exist when debt was priced to perfection,” he said.  Terwilliger said that demographics are increasingly oriented to apartments. And that properties built in 2008 and 2009 should be “delivered to terrific markets” when the shadow inventory would have been absorbed.