Few-if any-apartment executives can deny the industry’s impressive rebound out of the Great Recession, as renting became more popular. In fact, the number of renters has grown for the ninth consecutive year. And with 77 million Millennials coming of age, long-term demand looks solid well into the future.
But along every trend line, there are always some blips and dips along the way that can move companies’ performances sideways, if caught off guard. As part of a kick-off session for the 2014 NMHC Apartment Strategies/Finance Conference, a panel of market analysts took a look at first-quarter trends and evaluated the risks they posed for apartment firms in the year ahead.
Key concerns included the health of the macro economy, rising apartment supply levels and the sustainability of the industry’s rapid growth. However, in examining the data, the experts ran across a few surprises that suggest that the industry’s growth in the year ahead may not be the one step back, two steps forward that many had anticipated.
First, the economy’s tepid recovery looks to be gaining noteworthy momentum. Michael Cohen, director of advisory services with CoStar, said, “We’re moving away from the polar vortex and there are tangible signs that the U.S. economy is shifting in higher gear.” In fact, experts believed that GDP could achieve a 3 percent cumulative growth rate at the balance of the year, achieving what Cohen called “escape velocity.”
Jay Lybik, vice president of market research with Equity Residential, agreed, saying, “We’ve been waiting for this moment to finally say the economy has reached self-sustaining growth.”
Higher economic velocity means jobs, which are the key to unlocking household formations and driving housing demand. As demand continues to remain in lock step with new apartment completion volumes, the outlook for 2014 is that the industry will continue to see high occupancy levels and a significant amount of new construction activity-two metrics that experts had previously thought could experience some noteworthy erosion this year. National occupancy has been running at 95 percent since fall 2011.
Similarly, market analysts also were surprised that rent growth has remained steady, as many had expected it to start to move in the other direction. Through 1Q 2014, annual rent growth has been near 3 percent, a performance sustained for seven quarters, according to data provided by Greg Willet, vice president of MPF Research.
Willet also noted that remarkably many markets that had already seen strong rent growth were continuing to drive the overall solid pace of rent growth. For example, metro markets such as Oakland, San Jose, San Francisco, Denver and Portland all posted rent growth above 6.2 percent in 4Q 2013; in 1Q 2014, all markets had annual rent growth above 7.2 percent.
Similarly, markets that had posted weaker rent growth at the end of 2013 were again weak this quarter, although Willet noted that some of the lagging rent growth in the Northeast and Midwest regions appears somewhat weather related, so growth could tick up in the coming quarters.
During a panel discussion on REITs in the market, both Tim Naughton, chairman and CEO of AvalonBay Communities and Ed Pettinella, president and CEO of Home Properties, mentioned the winter weather as creating a drag on performance.
“Along the East Coast and Mid-Atlantic, we had record cold and snow fall three to four times the normal rate,” said Pettinella. “Next year, the year-over-year comparisons will be good. Relative to second quarter, we’re seeing a good bounce back. Even in D.C., we’re seeing a positive again. The wind is starting to get to our back.”
Naughton added, “The weather most impacted the Northeast, where we got pounded on the expense side but also the revenue side. We’re back the pace we were at in 2013, so I think that bodes well for the quarter and actually for the second half of the year.”