The apartment industry’s recovery out of the recession was fast and furious in many metro areas. While long-term prospects for the industry still look solid into the future, industry experts expect that some of the rapid acceleration in key metrics may temper as the industry transitions to a more mature growth phase.
During the 2014 NMHC Research Forum, apartment executives highlighted the 77 million Millennials who, as they come of age, should provide a steady stream of apartment demand for another decade. While this kind of long-term demand bodes well for the industry over the long haul, executives were also focused on the jobs picture in the more immediate term. With the overall market having recovered nearly all of the jobs lost during the Great Recession, executives predicted that many metros that had experienced rapid job growth-Dallas, Houston, San Francisco, Seattle, for example-would continue to see improvement, albeit at a slower pace over the next two years.
National estimates place vacancy rates at their trough, as new supply continues to come out of the ground. This means much of the phenomenal rent growth of the past few years likely will settle down and concessions could begin to rise slightly. However, executives were quick to note that while some metro markets have a significant number of completions coming online soon, the market hardly looks oversupplied on a national basis.
Several executives also noted some early signs of change in the transactions market. Between robust development pipelines in some metro areas and wide cap rate spreads, one executive noted many investors are turning to buying existing assets.
David Barker, a partner with Barker Apartments, pointed out that a number of key indicators have moved past prior peaks, suggesting that there could be a slight pullback headed for the market. Apartment prices, transaction volumes and debt availability are above prior peaks, although apartment values have yet to breach prior cyclical peak and market cap rates remain at record lows.
Apartment rents also have surpassed prior peaks, driving up the rent-to-income ratio to its highest level in a decade and reversing apartment rent versus ownership cost ratios. While rent growth is expected to moderate going forward, executives indicated there were growing concerns over apartment affordability. “We’re caught in a crisis of affordability versus availability,” said one executive.
While rents have risen, apartment executives also noted that income growth has not come hand in hand with job growth, with the median real income today at roughly the same level as more than a decade ago.
“You will generate income growth if you have a strong job market,” said Calvin Schnure, chief economist and vice president of research with the National Association of Real Estate Investment Trusts. “But if you have a very deep recession and weak job growth, you’re nowhere near generating the income growth needed.”