The X Factor
Still, despite the decoupling talk and the jobs numbers, the slight recovery in the first half of 2010 isn’t necessarily on sure footing. “The big factor is jobs,” Severino says. “I know a lot of people are talking about demographics coming down and how it will be a big driver for apartments, but a whole bunch of people unemployed is not a really good story for demand in multifamily.”
Granted, since the NAREIT convention’s optimistic sentiments in June, there hasn’t been a lot of good news. That month, the economy added only 83,000 jobs (many industry watchers felt we needed about 100,000 jobs to keep pushing the recovery). And in July, the numbers were worse, with firms only adding about 71,000 jobs. “I haven’t seen anything out there as far as the jobs or consumer confidence that would make us feel nice and warm and fuzzy,” says William Acheson, a REIT analyst with New York-based Benchmark Capital. “Retail sales and consumer confidence and the jobs that we have managed to create aren’t at a pace you need to even think about starting to get back on both legs.”
Though they may be accused of being overly optimistic, most economists who study the apartment sector think the patch we’ve hit in June and July is just a normal part of the recovery. “The economy is going through a soft patch,” Cohen says. “That’s not something that never happens during recoveries. You see a period of growth, you decelerate, and then enter areas of slower growth.”
Many argue, however, that without employment growth, the recovery simply can’t sustain itself. “To get to the next level [in the recovery] where demographics start working and home buying psychology starts working, you need jobs to bridge that gap,” says Haendel St. Juste, an analyst with Keefe, Bruyette & Woods. “I’m worried that without any job growth, the recovery may not be as strong as people might have anticipated.”
Part of his assertion is that job growth will be necessary in order to tap into the long-awaited demand from Gen Y. “I think you also have a younger age cohort still struggling,” Pelczar says. “The unemployment rate is extremely high among younger workers.”
If these people don’t get jobs, Willett says the 8 percent to 10 percent rent growth that owner/operators are expecting may fall into a more conservative 4 percent to 6 percent growth range. That’s still good, but not the numbers once envisioned. “The unemployment rate remains high, and it will for quite a while longer,” he says. “That will hold down wage growth. That puts some sort of a cap on the rent growth potential that’s ahead. I do think there is meaningful rent growth potential.”
