The Global Forecast
- Sep 03, 2009
If MHN’s global market report was a weather forecast, it might begin with gloomy clouds settling in over most of the multifamily world, with the possible exception of Washington, D.C. and Houston in the United States.
The forecast would then call for steadily brightening skies, especially over a number of coastal California cities and high-growth regions in the American South. Sun might also be expected to peek through clouds earlier than later in France, while in China, a downpour of easy credit has for-sale residential prices already on the rise.
Longer-term projections would trumpet the imminent arrival of cheerful, sunny days in more of the multifamily world. But forecasters would advise continuing to carry an umbrella in the American Midwest, as well as in India, Spain and the Emerald Isle.
Real estate experts identify a number of hotspots in the United States for multifamily growth now and in the near future. One of them is the Washington, D.C. metro market, says Mark T. Alfieri, chief operating officer for Dallas-based Behringer Harvard. From the perspectives of both operations and value, the metro area surrounding the nation’s capital has not been impacted as much as others, he believes.
“It has held its property value remarkably well, relative to other markets,” Alfieri says. “I attribute that mostly to the fact the job market is heavily influenced by government and other industries, and not so much by the economy.”
Also surprisingly strong is Houston. Even with an enormous amount of new supply, Texas’ largest city continues to absorb units. That’s likely due to positive job growth over the past few years, resulting in the overall economic downturn having little impact on property operations, he says. “I was concerned with all the new supply, but we have one major project there that has just been completed, and has leased up at our pro forma rents—the rents we originally projected back in 2006,” he reports.
In its studies, Property & Portfolio Research (PPR), an independent global research and advisory firm, has confirmed employment growth will be no less a factor in apartment demand than it has been in the past. That suggests an upbeat story line for the U.S. about 24 months out, says Michael Cohen, global strategist for PPR. Leading the way back will be California, which is expected to score five of the top 10 in value growth through 2013, reports PPR real estate economist Katie Schnidman.
California will not necessarily witness the most cumulative demand growth in the United States, but is expected to recover sooner, based on movement PPR analysts are spotting in the housing market, which impacts demand for apartments, Schnidman observes.
One of the most important factors influencing the forecast of phenomenal growth in a number of California markets is the value decline there, according to Schnidman.
“That means two things,” she says. “One is there is lots of value to be made up. And two, it makes California apartment communities very affordable, relative to where they were for investors. That said, rents are dropping steeply in these markets, making them more affordable for renters as well.”
That’s a crucial part of the demand story, Schnidman adds. As rents decline in places that in recent years have been comparatively unaffordable, such as Orange County, apartment demand will return. It is expected that more people will return to the coastal California markets, rather than moving east to the Inland Empire or north to Sacramento in search of more economical apartment living, she says.
While these are a few of the clear hotspots, hidden opportunities also exist. For instance, PPR analysts look very favorably upon the Raleigh area. The North Carolina city and its environs are somewhat representative of the favorable demographic across the entire Southeast, a region that is luring many younger Americans. PPR forecasts that Raleigh will deliver the best demand recovery of all 54 markets it covers.
For his part, Alfieri spots some hidden opportunities in southern growth markets such as Dallas, Austin, Houston, Atlanta and Phoenix, where institutional owners are liquidating portfolios at pricing and returns on cost that Behringer Harvard has not seen in two decades, he says.
Because job growth is so critical to the rebound in rental markets, it’s important to investigate international employment patterns and compare them with those of the United States.
According to PPR’s London-based real estate analyst Greg Mansell, the outlook for employment in the United Kingdom is very similar to that of the U.S. The U.K. is now experiencing jobless levels near the 8 percent range. Popular sentiment holds that that number will peak around 10 percent in mid-2010, Mansell says.
In France, the unemployment rate is climbing as well, to just over 9 percent, says Victoria Scalongne, another London-based PPR real estate analyst. However, in terms of their ability to afford housing, French consumers are in better shape than their counterparts in England and the United States. Household debt levels are lower, jobs are more secure and unemployment benefits are relatively generous.
“In France, you are entitled to unemployment benefits that directly relate to the period that you have been in employment, up to a maximum period of two years,” Scalongne reports. “And you don’t lose your health care coverage.”
In Asia, there appears to be sizable differences between developed countries such as Japan and Korea and developing countries elsewhere in the region. Developed Asia offers prospects for job growth that lag those of Europe, says PPR’s Boston-based international economist John Affleck.
“In India and China, as everyone knows, there will be a massive amount of job creation over the next few decades, as the economies continue to modernize,” Affleck says. “That certainly bodes well for residential demand.”
That doesn’t mean, however, that these markets stand immune to real estate cycles and bubbles. India, in fact, recently experienced the world’s largest real estate bubble, he says. What’s more, a fundamental disconnect remains in India between economically viable construction and the ability of the typical Indian to buy or rent an apartment. “There is a glut of high-end supply,” Affleck says.
Musts to avoid
When talk turns to areas for multifamily industry investors to avoid, there is clear consensus they are centered in the American Midwest. Alfieri reports that the areas Behringer Harvard is presently sidestepping include such heartland metropolitan regions as Detroit, Cincinnati, Cleveland and Indianapolis.
Schnidman concurs. “I don’t think I could reasonably recommend people invest in Detroit at the moment,” she says, adding that other than Chicago and probably Minneapolis, the entire Midwest is a tough sell.
“It’s a demographics situation at its core,” Schnidman explains. “Fewer young people are moving to the Midwest, and more are moving away from the Midwest. So in many of those markets, we’re seeing little to no population growth in the apartment-renting age cohort. That translates to less of a demand bounce-back, which doesn’t provide investors with the kind of value growth you’ll see in many coastal metros.”
Meantime, two of the markets to shun in Europe are Spain and Ireland. Spain is hamstrung by a huge issue of housing oversupply, with estimates ranging from 600,000 to over one million unsold homes across that country, Scalongne says.
It’s the same, or very similar, in Ireland. “It was heavily dependent on construction, which has shut down,“ Mansell says. “Housing became extremely unaffordable. House prices in both Ireland and Spain still have a very long way to fall.”
As Affleck notes, developers created a recent real estate bubble by “building into demand” throughout India, making that Asian nation the one for investors to dodge.
Reasons for optimism
A hopeful indicator of future apartment rental demand in the U.S. is that housing consumption patterns have reached their nadir, Cohen says.
“Sales of homes, and very likely sales of condominiums, have bottomed,” he reports. “So levels of competitive shadow supply are at their peak right now. Current shadow supply is at its worst. Right now, you have a reduced pool of would-be renters, some of them going to the shadow supply. And as that gets chipped away, it will remove the headwinds” to rental demand growth.
Alfieri terms this “a very interesting phase in the market.” A phenomenon contributing to that assessment is the increasing number of buyers he had seen entering the market over the 60 days leading up to our early August discussion. Earlier in the year, he had seen only a handful of offers for institutional-quality apartment communities. Today, there are typically 30 or 40 offers for each, he reports.
“The interesting part of it is that pricing hasn’t increased with the increased numbers of buyers in the market,” he adds. “Most are buying into a market with a whole new cap rate paradigm. Pricing is not being influenced by the number of buyers.
“But the interesting thing is, there are more of them,” he adds. “It’s an indication of the intrinsic value you’re seeing in the real estate investment market today.”
Alfieri reports he and his colleagues at Behringer Harvard are extremely bullish on this asset class for 2011 and beyond. They point to favorable demographics and the fact new supply forecasts are at historic lows for the next two years, on the heels of historic supply lows recorded in the last two years. “With the hope our economy is nearing the bottom and starting recovery, when the employment situation improves, we should see historically high rent and occupancy growth in this sector,” Alfieri says.