What's Next for the Apartment Recovery?

The recovery that was predicted a couple of years ago has come to pass. Now the question is whether it will be as good as we predicted.

Boca Raton, Fla.—The mood was optimistic as multifamily executives assembled at the National Multi Housing Council (NMHC) Apartment Strategies Conference for a look ahead at what’s next for the industry in 2012 and beyond. The pace of rent growth is expected to ease in 2012 but still maintain levels above the trend. “The recovery that was predicted a couple of years ago has come to pass. Now the question is whether it will be as good as we predicted,” said Mark Obrinsky, vice president of research and chief economist, NMHC, who moderated “Looking Ahead: What’s Next for the Apartment Recovery?”

“The general forecast as consensus would have it,” added Obrinsky, “seems reasonable to me.” Provided there’s no economic meltdown in China and no break-up of the Euro Zone, we can expect GDP growth that’s better this year than in 2011; but at 2.5 percent, that would be a bit less than the long-term average.

Obrinsky also observed that government spending at all levels (expect further efforts to balance budgets as well as personnel reductions and spending cuts) is expected to be a negative for the economy, but not as much so as in 2011. Most economists expect inflation will retreat some in 2012, and that the Fed will not tighten monetary policy in the year ahead. Job growth, Obrinsky added, will only be somewhat better than in 2011.

Panelist Ron Witten, president of Witten Advisors LLC, said, “as we look at the last couple of months it seems that there is reason to be a little more optimistic than the consensus about job growth.” He noted that the unemployment rate is a key corollary to income growth and rent prices. “We need jobs for young adults. Apartment recovery does depend on jobs, especially for young adults.”

According to Jay Lybik, vice president, market research, Equity Residential, “We lost two million jobs in construction and another two million in manufacturing during the great recession. As jobs are added back, they are paying less.”

Lybik shared that every month on Friday morning he’s up early to catch the Current Employment Statistics survey (also known as the Establishment Survey) released by the United States Department of Labor and used to calculate the job growth number. “I also watch the Household Survey (a.k.a. the Current Population Survey.) The two are done differently and you can’t mix them. The Household Survey is a small number and it is very volatile data. Be careful about the conclusions being drawn.”

Lybik agreed that 2012 will be a better year economically than the forecast. “Auto sales are an important indicator and they’re currently showing an increase in consumer confidence and the ability of consumers to obtain financing,” said Jay. He suggested watching this barometer as he expects that auto sales will continue to rise.

Lybik forecasts the homeownership rate will rise slightly in the next couple of years and then reach 64 percent in 2020. Witten sees the homeownership rate at 65 percent in 2014. The panel discussed an ongoing issue: the effects of the single family market on multifamily, concluding that a prosperous apartment market does not depend on the flight from homeownership. Apartments don’t need falling homeowner rates to succeed. In fact, Lybik remarked that single family comprises 37 percent of the rental market in the U.S.—about 14 million rental housing units—and that rental houses are a huge component of the rental market.

“The prices of renting and owning can be similar,” noted Lybik, “but you have to have a large cash down payment which is a barrier to entry.” In fact, a recent Brookings Institution study found that only 25 percent of American households could come up with 2,000 cash in 30 days. “Be careful when looking at this affordability [of single family housing] issue,” he added.

Witten observed that there are attitudinal barriers currently working against home buying. “It’s the psychology of ‘I don’t want to be a buyer,’” he said. “But these [barriers] can fade as we get more optimism in the market. “

Compared to previous years, singles are still the largest renting demographic. Lybik noted that most are likely to buy a home one year before—or after—marriage. But females are putting off marriage to an older age. In 2010, 55 percent of 25- to 29-year-olds had never been married. In 1980 the number was 29 percent. Another trend to watch is the fact that more females are graduating with Bachelor’s degrees than males. How will this education factor—and the number of women postponing having children—impact the multifamily market going forward? These trends also bode well for continued demand on apartments.