Economists Report on the Multifamily Market at NAA Conference
Apartment industry professionals weren’t dissuaded by waiting for the 2017 National Apartment Association Education Conference and Exposition’s final session to hear from multifamily market economists.
Jay Parsons, vice president data analytics at RealPage, was among panelists who fielded several questions about the growing rent-to-income gap between Class A and B properties and how supply and demand imbalances will affect construction lending. Panelists also said the industry shouldn’t worry too much about new reports that say younger renters are buying more single-family homes.
The general consensus was that while there are some signs of economic weakness, the eight-year run since the last recession still has a few miles left, which bodes well for the apartment industry.
B market remains strong, affordability issue downplayed
The shifting Class A market and its effect on Class B and C sectors dominated the conversation moderated by NAA Director of Industry Research and Analytics Paul Munger. Rent growth slowdown in the highly-amenitized A sector attributed to oversupply resulting from significant new construction coming online has opened new opportunities for the Class B market, economists say.
Parsons said the B market is in “phenomenal shape” partly because of an abundance of new Class A supply coming on line and the big rent gap between the products. Even though the Class B rents are significantly higher for new product than in the last cycle, Class A properties are having a tough time luring renters, despite offering concessions. In some areas of Houston, high-amenity properties are dangling up to three months free rent and still aren’t pulling from the B market, he said.
“At some point when demand goes away, you can’t use the age-old strategy of pulling out Bs by offering concessions,” Parsons said. “It just hasn’t worked in this cycle.”
One thought was that the multifamily industry may have even missed the boat by not building enough Class B apartments, instead opting for more expensive and high-amenity apartments.
Parsons downplayed any notion of an affordability issue in the industry, pointing to a steady income-to-rent ratio throughout the cycle. He said new renters are still spending the same 22 percent of their income on rent today, according to RealPage lease transaction data, as they did when the cycle began eight years ago. He noted that real estate investment trusts, which generally cater to Class A and B properties, report that rent-to-income ratios haven’t budged.
He added that while starts are slowing there is still much activity. Panelists agreed that there won’t be any let up of new construction until at least 2019.
“There are still a lot of deals that are going through, Parsons said. “The challenge is for smaller groups and those developing in newer spots. They are having a hard time getting going.”
‘Home buying isn’t bad for our industry’
Zillow Directory of Economic Product and Research Krishna Rao said areas that are driving job growth, particularly in healthcare and technology sectors, will be most attractive to developers for future construction. The Sunbelt is likely to benefit as employers look at relocating in lower cost-of-living areas where they can find similar talent for less wages.
Economists said multifamily shouldn’t get too concerned about reports that Millennials are starting to buy homes, which could cut into rental occupancies. The National Association of Realtors says that the share first-time home buyers increased 3 percent to 35 percent last year.
“I wouldn’t lose sleep over it,” Rao said. “There is the narrative that Millennials are different. Saving for a down payment is a huge hurdle. We see Millennials renting longer than prior generations because of financial considerations.”
The consensus was was the apartment industry can’t bank on Millennials to grow deeper roots in the urban core and that they will eventually pursue the American dream of home ownership, likely in the suburbs, where urban-like settings promote the live, walk, play lifestyle.
Not to worry, says Parsons. While it may be inevitable that Millennials trade renting for a mortgage payment at some point, more renter supply will be in the wings. In fact, increased home building is not necessarily a bad thing for the apartment industry. When single-family neighborhoods populate, the renter prospect pool is regenerated by new household formations, plus there are always people looking for less expensive housing upon graduation from high school and college.
“Home buying isn’t bad for our industry,” he said. “When homes are selling its reflective a good economy, households are being formed. You may see turnover pick up but there’s a trickle-down effect that that creates more demand for housing.”
Demographics adding strength to current cycle’s run
Demographics, too, suggest that the renter pool will remain strong for the next several years. Millennials and Baby Boomers represent huge parts of the population – last year Millennials overtook Boomers as the U.S.’s largest generation. Mortgage and banking industry studies suggest that the strength of the Millennial generation just in sheer number has skewed the renter demographic.
“What was fascinating is that the big shift for Millennials wasn’t that more younger people were renting to share the pie, the big change is there were more people in that 20-something age group to go rent apartments,” Parsons said.
The same can be said for Boomers, who are looking to rental housing and urban living as children leave home. While the percentage of Boomers renting generally remains the same as in previous cycles, girth of the demographic means the industry will have a larger pool to market toward.
Ultimately, Parsons said, the biggest benefactor to decreased home sales in the cycle is actually home renting, not the apartment industry.