The Longest 7th Inning in Multifamily History
Despite uncertainty, multifamily poised to continue extended run of current cycle
A tumultuous presidential election that some blamed for rattling the U.S. economy beforehand but has since energized the market has unquestionably added another layer of uncertainty for the business sector. And, while apartment industry leaders may question what lies ahead just as others, multifamily housing seems poised to continue an extended run of the current cycle.
Well-insulated markets and demographics are providing a buffer that some analysts believe will continue brisk growth in 2017.
Apartment researchers who bantered about the future of multifamily housing at November’s National Multifamily Housing Council OpTech Conference & Exposition in Dallas say keeping your nose to the grindstone and listening to the data is good practice for the next 12 months. Despite some economic indicators that are sending mixed signals to the rest of the country, the apartment industry still has a lot going for it.
As economy grows, multifamily will continue to benefit
Through November, the current economic expansion rang in its 87th month. This is the longest streak since 1960, when America settled in behind presidential candidate John F. Kennedy’s plan to accelerate economic growth on the “New Frontier.”
Within hours of Donald Trump’s election as the nation’s 45th president, the markets bounced back after dropping significantly, and that momentum carried through the end of November. That’s a good sign for the near future of multifamily, says MPF Research Vice President Jay Parsons.
“The apartment industry has never been big enough to produce its own recession,” he said during an OpTech general session. “As long as the economy and markets are doing well, it does well.”
Parsons noted that multifamily doesn’t really have the affordability problems that some people think. The demographics that drive apartment rentals have fared better than other economic sectors because incomes of new residents typically increase. And rent-to-income ratios are looking fit.
“There is this perception that we have this ginormous affordability crisis, and that perception really isn’t backed up by data,” he said. “What the data tells us is that rent-to-income ratios have held pretty steady and at pretty healthy levels. The segment of the population that the apartment industry caters to economically has fared much better this cycle.”
The apartment industry has been able to bank on a growing segment of younger adults who are prime candidates for renting. Younger workers, while earning lower wages, are replacing older employees who may have lost jobs, including many who weren’t renters.
“You can focus on the overall income numbers in the U.S., but the reason there has been lackluster growth is you’ve simply replaced higher-wage and more-experienced workers with less-experienced workers. But the offshoot is that these new workers are renting apartments and those they replaced did not.”
Baby Boomers will continue to make impact
Panelists agreed that downsizing Baby Boomers will continue to fill units in urban areas and Millennial migrations to the suburbs will pick up the pace. Millennial movement likely will be stimulated by the decades-long decline in urban schools and little effort to fix them up, some experts say. The suburbs are believed to provide favorable ground to start families and raise kids.
And, as Millennial renters move to the suburbs, new renters – including Baby Boomers – will fill those gaps, Parsons says.
“There are a lot more people in this age group. The raw numbers support more demand for Baby Boomers.”
MPF Research believes there’s still another year or so of legs in late-recovery markets like Sacramento, Riverside, Las Vegas, Atlanta and Phoenix – all should remain strong. Additionally, the apartment data and research group, assuming economic growth continues, remains bullish on high-demand, high in-migration markets like Seattle, Denver, Texas, Carolinas and Nashville even with high supply on the way.
The only thing to fear may be fear itself
One of the greatest obstacles the apartment industry may face, however, is falling prey to those who react on fear, Parsons says. He said smaller management groups tend to overreact when their nearby competitors “panic” and lower rents to fill units.
Markets like San Francisco, Houston and New York that have lagged a bit lately could feed such rate panic and rattle the industry if operators let it. Parsons says industry executives should tend to their own backyards if their internal dynamics are strong and don’t overreact to baseless decisions by competitors.
“This industry very much obsessed with what its neighbors do and they think a lot about how they should react to it,” he said. “The problem, though, is if your neighbors are irrational and you’re tethering your decision-making to your neighbors’ irrational decision-making, then by extension you are also going to make irrational decisions. You have to keep an eye on the competition but you don’t want to overreact to it.”