‘The Accidental Economist’ with Jack Kern: Sequestration, The Gift That Keeps on Giving…

The rental apartment business runs on two things: job growth (or net effective disintermediation of primary jobs into secondary services categories) and consumer confidence. I suspect you’re reading about or hearing about sequestration (dictionary definition: stupid tricks Congress plays to get re-elected) and, like a lot of my colleagues and friends are asking what it will mean. Well to start with, estimates have been made that the planning and destructive nature of this will cost at least $1 billion overall, just in government related costs. In the apartment business, the effects will be spread out more evenly between government dependent and non-military related places. There is little doubt there isn’t a ton of difference between small metropolitan areas that have large military bases and large metropolitan areas that have a small military and civilian presence. Employers that offer the kinds of incentives and promotions that help create highly compensated individuals who are renters will delay making these kinds of investments in their services and manufacturing staff because ultimately the tentacles of sequestration will reach into the revenue stream of every company if stupidity prevails. Between petulant Pelosi, John, the weeper of the House, Boehner and “I Can’t Cut a Break” Obama, it doesn’t look good. On a more selfish note, here in the Washington metro, the less-than-useful bureaucrats will be off the roads so traffic will ease up and less carbon will get spewed into the atmosphere (above what Congress already produces), but I suppose the sandwich and donut places will suffer.

The multifamily industry is seeing something of a slowdown between the normal seasonality and some limited pricing power, but generally trends are still positive and rent growth is evident in a lot of popular and not-so-well-known places. With income growth generally stalled, the renters that are now coming into the market are more selective but still able to afford living in a nice community. Sequestration will probably create a competitive reaction among everyday suppliers, which mean thinner margins at the grocery and fuel stop, lower prices for essentials, but higher costs for those discretionary items like cupcakes, scotch and smokes.

The bigger issue is the federal budget, for which out of control spending on both civilian and federal agencies has put us on a path to higher inflation and slower job recovery. Since we’re about three years away from full employment again, if spending gets under control, and consumer confidence is much higher, you will see results in rents, vacancy and disappearing concessions all reach well above the levels of performance in 2007. And that’s worth waiting for.

Jack Kern is the research editor of Multi-housing News and Commercial Property Executive magazines. Living near Washington, D.C., has helped keep his utility bills down because of all the free hot air that comes out of Congress. In his spare time, when he isn’t annoying members from both sides of the aisle, Jack likes to sing in his band and write songs about real estate. His latest album, “Rent Increases for the Clueless,” is due to come out in time for the holiday season. It will be a great gift!

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