Explaining the Surge
It’s all great news, right? Sure, until you ask the dreaded question: Why? Why are the numbers so improved? What’s causing the rise in rents and occupancy levels? For some, the answer might lie in the industry’s new lexicon. Before 2010, the words “decoupling” and “unbundling” didn’t exist, but the first half of 2010 changed that.
Armed with surveys and anecdotal evidence, the REITs came to Chicago offering an explanation for why fundamentals were flourishing. Equity’s surveys said that renters were moving out because of job changes or transfers; they wanted to split from their roommates; or they just need more space. But the concept of decoupling (or unbundling, if you prefer) is a lot simpler than that: 25-year-old Tommy decides that his job is secure enough that he can finally say good-bye to his roommate Zach’s clutter, loud music, and annoying girlfriend.
“The improvement in consumer confidence is part of unbundling,” said Bryce Blair, CEO of Arlington, Va.-based AvalonBay Communities, which owns 45,000 units mainly on the coasts, at NAREIT. “People are thinking, ‘If I haven’t lost my job yet, I probably won’t.’”
Flash forward two months, and the unbundling argument still holds water. Tommy left Zach’s apartment, and he’s a lot happier in his studio. But analysts and economists argue that, in more instances than not, Tommy moved into his own place because he got a job at Bank of America, not because he got promoted at the local pizzeria.
“The reason people decouple is because they have a job, and they can move out on their own as opposed to staying with their family or staying with a roommate,” Levy says. Up until the employment figures for June posted (which weren’t as uplifting—stay tuned), the economy had added more than 1 million jobs in 2010. Analyst after analyst insist that this growth can’t be overstated. “A million jobs is enough to get people back out renting apartments,” Severino says. “That’s why I’m not totally sold on the decoupling thing.”
Others agree. “I think decoupling is simply a buzzword that’s being thrown around the industry,” says Michael Cohen, a research strategist for CoStar. “I think when you dig into what happened in the last six to nine months, one of the conclusions that we reached was that it was job growth that played a big piece of the puzzle in terms of this recovery.”
In part, 2010’s increased demand has also been fueled by people who are either unable or unwilling to buy a single-family home. Perhaps Tommy’s doing well at Bank of America. But after seeing his brother Ted (who impetuously took out a three-year, adjustable-rate mortgage and overspent on his ritzy condo) lose it all in foreclosure, he feels he’s not quite ready for that kind of long-term commitment.
“The current high propensity to rent versus own is helping apartment fundamentals,” says Andrew J. McCulloch, an analyst for Green Street Advisors, a Newport Beach, Calif.-based consulting and research firm.
And that trend is picking up steam. In the second quarter, the home-ownership rate fell to 66.9 percent, which is the lowest it’s been since 1999. “People are renting for a while just to decide what they’re going to do,” Willett says. “It’s all of those things coming together at once that drives rental growth.”
