Palm Springs, Calif.–“The apartment sector is doing better than most. Ours is a cyclical business and we’ll be leading the recovery,” said Doug Bibby, president of the National Multi Housing Council, in his opening statements as he kicked off the 2011 Apartment Strategies Conference in Palm Springs, Calif. “The current environment remains challenging and difficult,” he added. “Today’s panelists will address key strategic issues.”
The mood in the air was cautiously optimistic but much more upbeat than at last year’s gathering. “This time—two years ago—we hadn’t found the bottom yet. Last year we said, ‘Okay, we know where the real bottom is. This is a bad recession. It won’t be easy, but we can handle this.’ This year, we’re looking back and saying, ‘It’s not as bad as we expected,’” says Mark Obrinsky, NMHC vice president of research and key economist.
In fact, it appears that the apartment industry has outperformed the U.S. economy in 2010. Greg Willett, vice president of research and analyst for MPF Research, notes that apartment revenues jumped about 4 percent during 2010, and 2011 performance is expected to be even better. Occupancy jumped by 170 bps to 93.5 percent, and effective rents climbed 2.5 percent, demonstrating that the industry is not totally reliant on job growth. The economy lost 8.2 million jobs during the recession. Only about 1 million jobs were created in 2010.
“In most metros, at the top of the market the recovery is nearly complete,” says Willett. “But there is still work to do in the older units at the bottom tier of these same markets where rents are flat and there are huge vacancies.” With no new product to compete, the top end is positioned to do well regardless of the economy. Experts anticipate that while there will be construction starts in the next few years, there will be few completions. The bottom end of the market, however, has work to do and will rely more on job creation to get those units leased up. This is a time to focus on the level of service at these communities to retain current residents and attract new ones.
Some research experts at the event are questioning the apartment industry’s growing reliance on employment data when household formation numbers are a more accurate indicator. For example, 50 percent of the jobs lost have been in manufacturing and construction, but other sectors such as healthcare and education have been creating jobs during the downturn. Employment data is a very fluid and quick series by which to judge metro performance, but households create more meaningful data for housing research. The Joint Center for Housing Studies at Harvard estimates that, during the 2000s, the United States added between 1.2 and 1.3 million households a year. During the recession the household growth rate declined but didn’t go negative. Households are still being formed even when jobs are being lost.
However, the sluggish rate of job creation is playing out well for the apartment industry because of its negative effects on the single-family market. As more and more Americans turn to rentals, vacancy rates are declining across the board, even in hard-hit markets in northern Florida. Another reason for good cheer in the apartment industry is that virtually no new supply is coming online for the next couple of years.
Panelists agree that a slow to moderate growth scenario would be ideal for apartments. “In 2011, look for revenue growth near 6 percent with occupancy up by 80 bps and rent increases averaging 5.1 percent,” says Willett. As new households are formed, the decision will be to rent. “There may be a bump in the road in 2013-2014 when new supply comes on stream and pent-up demand for home purchases could get unleashed,” he adds.
Until then, however, single-family home ownership will be seen as less desirable by a growing number of Americans even when they can afford it. Renters by choice will be on the rise due to benefits such as the freedom to pick up and easily move to another city for career reasons. This demographic won’t see a house as a vehicle of wealth but as a deterrent, panelists stress.
Apartment analysts also warn against making decisions about 2011 based on recovery patterns from the last recession. Their advice is to focus on the fact that this is a cyclical business, but realize that the last 15 years were an anomaly. The shift to homeownership changed the dynamic of the forecasting process. “You can’t look back to the last recession,” says one panelist. “Don’t get caught up in what happened 10 years ago and think this situation will mirror that.”