Thanks for Joining Us in Denver!
A record number of attendees gathered in Denver for the first in-person NMHC Research Forum in the past three years. Presumably, they were motivated by a compelling agenda and a desire to start to make sense of the past two years and what impacts they will have on apartments in the next five to 15 years.
In general, most agree that the industry has a bright future thanks to strong demographic trends and increased operational efficiencies accelerated by the pandemic. It’s evolved from an alternative asset to a prime target for investors. As one speaker put it, “We’ve gone from being Rodney Dangerfield to George Clooney… and everybody wants more George Clooney.”
But there are strong headwinds that could limit its performance. Rising construction and labor costs, supply shortages, overall inflation, NIMBYism, an onerous regulatory environment, rising rents (and the scrutiny they bring), rising interest rates and the potential for a recession in the not-too-distant future.
Against that backdrop, the Research Forum helped fill the information gap with data and analysis by some of the industry’s leading experts.
Doug Bibby's Data Legacy Will Endure
Not every CEO understands the value of research, and that was especially the case back in 2001 when Doug Bibby became NMHC’s second President. And it will continue to pay enormous dividends after he retires in January 2023.
But Doug did. In fact, on his first day as the head of NMHC, he told the team that data and facts were priorities. “We are not going to be known for rhetoric. We are going to be known for the quality and the integrity of our data. Because when we go talk on the Hill or we go talk to the media, it's got to be with credibility."
Why it Matters: With that, Doug set the tone for the organization that NMHC would become over the next 20 years. The results of that early investment have been enormous. They not only helped the industry become a prime investor target but also proactively responded to the many crises the industry faced during his tenure—a leader who started on 9/11 and will be retiring at the end of a global pandemic with a global financial crisis thrown in the middle.
And it culminated in what might be his ultimate legacy to the industry—the creation of NMHC’s Research Foundation. Read more.
Demand Will Be Strong, But a Little Less So
Increased apartment demand has been outstripping new supply for at least a decade, but household formation has slowed considerably – and even stopped during the pandemic. Real estate finance professor Norm Miller unveiled the early findings of a newly updated study NMHC will release in the coming months looking at apartment demand through 2035.
His conclusion: Apartment demand will continue to rise, but at a less rapid pace, somewhere between 25-30% lower than prior forecasts.
Why the change? Almost zero population growth and low levels of immigration, but also the economic outlook. He anticipates inflation and economic contraction in the short term, but a major recession in 2029 to 2030 because of the federal deficit and growth in Social Security, Medicaid and Medicare entitlements.
Winners and Losers: Migration trends will affect which markets gain and which markets lose. Metros with better city management and an economic base in tech and life sciences will win. The top five markets with the greatest demand for 5+ rental units: Dallas, Houston, Charleston, S.C., Austin, Texas and Phoenix.
On the losing end: Cleveland, Detroit, New Orleans, St. Louis and Chicago.
Interesting Takeaway: Older White people and older and younger Hispanics are the big growth categories in Miller’s forecasted population growth through 2035.
Even With Slower Demand Growth, the U.S. Is Seriously Under-Housed
The U.S. has gone from a glut of housing, 1.9 million excess vacant units in 2005 to a current shortage of all types of housing units. Even with today’s strong supply pipeline, it will not be enough to close the gap. See the presentation. Important note: Presentation materials are available to NMHC members only.
How Big is the Gap? As with many things, that is up to interpretation.
Using a model that combines housing demand fundamentals, vacancy rates, the impact of high housing costs on household formation and more, Len Kiefer, Macro Housing Econ Senior Director and Deputy Chief Economist at Freddie Mac, estimates the U.S went from 2.5 million too few units in 2018 to 3.8 million in 2020.
Chris Porter, Chief Demographer at John Burns Real Estate Consulting, comes at the question from the perspective of demographics and household formations and estimates the shortage is closer to 1.7 million, noting that the adult population grew by 1.7 million fewer people from 2010-2020 than the prior decade. In a slight contrarian position, he estimates we are about to enter a period of unsustainably high construction, with recent permits and starts exceeding long-term need by approximately 400K homes.
Big Caveat: Both agree, however, that undersupply is not a national discussion, but rather one playing out very differently by region. They also agree that how migration patterns shake out after the pandemic shuffle will be important.
Housing Affordability is a Problem, But the Data Don’t Support the Rhetoric
The rhetoric driving the media and policymaker discussions of housing affordability does not match the data. Activist groups are exaggerating the size of the problem implying all renters are cost-burdened. They aren’t. Most renters in institutional-grade properties are not cost-burdened.
And what about that eviction tsunami that never materialized? It was unlikely it ever would, given NMHC’s Rent Payment Tracker data showing that 90% of renters paid their rent throughout the pandemic.
Why the Disconnect: Because the media and policymakers think of apartments with broad brushes and all renters as people who can’t yet afford to buy a house. Harvard’s Chris Herbert notes that there are three distinct groups of renters: renters by choice, the middle market and low-income renters. The first group isn’t cost-burdened and we need different solutions for the last two.
What Should We Do?
Tenant activist groups and housing providers don’t agree on a lot, but there is a broad alignment that we need more funding to build and maintain affordable housing and more subsidies for low-income households. Add in zoning and regulatory reform, state-level incentives or mandates to overcome NIMBYism, and the infrastructure to support innovations in housing production and you would be talking about solutions that can scale.
Thought Bubble: Economics says supply cannot create demand. But what if it has in the apartment industry? In the past 20 years, apartments have become very desirable places to live. That has changed the equation with more people choosing to rent for lifestyle reasons and people living longer in apartments.
Recession Odds are Rising
Inflation will continue both as a result of increased demand (think COVID-19 stimulus funds) and rising costs (think supply chain disruptions). As one speaker noted, globalization, which helped keep wages and prices down for 40-years is ending as nations react to those disruptions by de-globalizing and starting to build more things at home for defensive reasons.
Cristian deRitis, Deputy Chief Economist of Moody’s Analytics, diagrammed the path to a recession as a chain of dominos. See the presentation. Important note: Presentation materials are available to NMHC members only.
Multiple supply shocks will lead to more aggressive tightening, sending interest rates higher and slowing the economy. The spillover to housing will be higher mortgage rates that will further reduce housing affordability. Rising Treasury rates will pressure cap rate spreads.
Whether you look at Moody’s model or the 10 yr-2 yr rates, deRitis shows the odds of a recession at 20% to 30%.
Another complication in keeping the economy growing: Near-zero population growth and lower immigration means we’re going to run out of people to keep fueling job growth.
Hungry for More Data?
NMHC has you covered. NMHC’s Claire Gray reviewed the many data available on NMHC’s website. This presentation provides a great overview of the kinds of research and data NMHC members can access. Or you can explore the data yourself here.
Want to know about industry performance? Check out our industry benchmarks (for conventional multifamily and student housing), Quarterly Survey of Apartment Market Conditions, Market Trends newsletter or the Market Conditions section of Quick Facts.
Looking for a Data Point? You can probably find it in Quick Facts. There are sections for resident demographics, the apartment stock, apartment financing and investment, new construction and ownership and management. You can even download the data for your own use.
Of course, there are deep-dive research reports on a wide variety of topics: Student Housing Income and Expense, Resident Preferences, Impacts of Rent Control, Apartment Returns, Apartment “Filtering” and much more.
See Who Was at the 2022 NMHC Research Forum
The NMHC Research Forum held record attendance with industry leaders and researchers in participation. For event photos of your colleagues, friends and co-workers, click here.
Meeting Materials and Resources
Didn’t catch a full presentation? Or want to dive into a data deck? We’ve got you covered. All NMHC meeting materials for the Research Forum can be accessed here. Important note: Presentation materials are available to NMHC members only.