Even if occupancies stay the same, operators need jobs to push rents. Without wage growth, that’s hard. “Jobs matter in that they help the decoupling process,” Nechayev says. “Jobs also matter in growing income for people. If the economy were to weaken substantially, even though the demand is there, there will be little room for increases and meaningful rent growth.”
And to those people thinking the REITs could see their highest NOI growth ever from 2012 to 2015, Acheson offers a more sobering prediction: “A number of people have been drinking the Kool-Aid and figuring NOI growth in the high-single digits,” he says. “I’m not one of those. At some point, you have to be more realistic.”
—Data and charts compiled by Laura McKenzie
The Y Factor
Why the homeownership conundrum matters.
The rental industry’s unbridled optimism has gone mainstream. In the latest issue of Barron’s, an article titled “Renter Nation” projected that the nation’s homeownership levels would drop to around 60 percent. (The level has already fallen to 67 percent.) Meanwhile, USA Today published a story saying that the figure would fall to about 62 percent.
Where that rate eventually settles will mean a lot for apartment owners. Depending on who you believe, each percentage point drop in homeownership equates to 1 million to 1.5 million renters. While no one expects to see homeownership push 69 percent anytime soon, very few people expect it to fall to the 60 percent mark predicted by some pundits. Most analysts feel the figures will stabilize somewhere in the mid-60s.
That, of course, will be driven by healthy demand by the long-awaited Gen Y demographic. “There’s a coming wave of younger cohort demand that will sustain and boost apartments in a three- to seven-year time frame,” says Haendel St. Juste, an analyst with New York-based Keefe, Bruyette & Woods. “We have a wave of Echo Boomers entering the market. They have a higher propensity to rent.”
The problem is that rentals have a rock-and-a-hard-place effect on rentals. On the one hand, fewer homeowners means more people are renting. But on the other hand, a struggling for-sale market hurts the economy. “If ownership drops, owner demand falls, which means prices fall,” says Gleb Nechayev, vice president and senior economist for Boston-based CBRE Econometric Advisors. “If prices fall, rents fall. You want stabilization in the housing market and broader economy for apartments to continue to do well.”
What’s more, as the economy turns around, it could further hurt the rental industry. “In so many markets, there is no premium to buy versus rent anymore,” Willett says. “There’s the potential that you could start losing people to home purchases.”
Others agree. “If the economy gets stronger and people have growing incomes, it’s a risk for apartments; those who can afford to buy might buy,” Nechayev says. “Some good residents might go into home ownership.”
The Z Factor
Oversupply may return full force.
One of the major reasons that apartment owners are so optimistic about the next couple of years is because the supply of new apartment stock has dwindled. After peaking at 352,300 units in 2005, new multifamily starts fell to 283,500 and 108,900 in 2008 and 2009, respectively. This year doesn’t look to be much better with 94,000 projected starts in 2010.
But the REITs, such as Arlington, Va.-based AvalonBay Communities and Chicago-based Equity Residential, are already jumping back in the game. Some formerly prolific privates, including Atlanta-based Wood Partners and Denver-based Archstone, are also breaking ground.
Even with a still-difficult construction debt market, some industry watchers think supply will come back in a big way over the next couple of years. “If things start improving, you could suddenly see more new supply than people expected,” says Gleb Nechayev, vice president and senior economist for Boston-based CBRE Econometric
Advisors. “Supply is something to keep an eye on. If people believe that the rental market will do well, then why not build more?”
William Acheson, a REIT analyst with New York-based Benchmark Capital, agrees. “I think you’ll see people pull from a shadow portfolio of developments and start putting them in the active development pipeline,” he says.
That’s why Acheson thinks those not expecting new competition may be ultimately disappointed. “The supply/demand situation won’t be as rosy as some of these guys are expecting,” he says. “Developers do what developers have always done, which is raise new supply to ruin the party. That’s what they do.”
