Culkin

LOS ANGELES-"We expect GDP to begin recovering in 2010--but at a modest 1.7% to 2% percent growth rate." So said Doug Culkin, president of the National Apartment Assoc., during his keynote address at RealShare Apartments 2009 conference. Culkin, along with other panelists throughout the full-day event, pulled together trend lines from established economists and research firms in the apartment industry to accompany their outlook. From their analyses, the coming year will be an interim period for the national economy, employment and the apartment industry and its financing.

The event, hosted by ALM’s Real Estate Media Group, was held Oct. 8 at the Westin in Downtown Los Angeles and attracted more than 1,000 attendees, all hoping for some kind of clarity on the current state of the national apartment market.

The Fed has revealed that interest rates will remain low--but consumer spending "is also expected to remain dampened by Americans’ wait-and-see attitude on a number of economic and policy fronts," Culkin said. "Anxiety about jobs will continue." Culkin expects unemployment to hit the 10% threshold very soon, followed by a long, slow downward trend as employers gradually begin hiring. In California, unemployment has remained higher than the country as a whole--currently over 12%.

"As many economists have put it," Culkin noted, "recovery from this recession is more likely to resemble a ‘U’ than the ‘V’ shape that has characterized recoveries of the past couple of decades." The good news is that home sales are expected to recover slowly over the next year to the range of 5.3 [million] to 5.5 million units, Culkin explained, but the bad news is that at least 20% of those sales will be foreclosures.

The "shadow market" competition that followed the housing market bust will continue to be felt in 2010, Culkin said, brought on by failed condo projects going rental, foreclosed single-family homes becoming rentals and a continued lack of job growth. For those on the operations side of the apartment market, next year’s outlook will be more of the same, he explained. "We are looking at pressures on rental rates [to] remain, and vacancy rates are expected to remain higher than we would like."

The consensus view from Culkin and other morning sessions that followed was that rents are expected to remain at or below 2009 levels next year, depending on location. Culkin pointed to an analysis from Witten Advisors, which anticipates a 3% slide in rents overall as apartment owners lower prices to compete with the shadow market and head off another run in loss of renters to home purchase.

Moving to the capital and mortgage market outlook, perhaps the biggest unknown, Culkin said, is how lenders manage their apartment portfolios. Will they continue to extend maturing loans or demand repayment, or at least sizable pay-downs? "At present, current policy appears to be extending loans that are still performing, even if they are in default for other reasons--maturity, loan-to-value shortfalls, and inadequate debt coverage." Another unknown is whether that policy switches to foreclosures, in which case investment funds would be ready to buy, according to Witten Advisers.

Looking ahead at capital markets, there is a possibility of some re-freezing in 2010, but it is unlikely we’ll be seeing anything as icy as the capital markets of 2008 and earlier this year, Culkin explained.

Another unknown that Culkin pointed out is what Congress will resolve to do with Fannie Mae and Freddie Mac, but he doesn’t expect a decision on that until later in the year. He also mentioned the plan being considered by Treasury that would allow homeowners to stay in foreclosed homes for seven to 10 years as another uncertainty. "If this action is a mandatory requirement of lenders, it would reduce the available renter pool in 2010," he said. "On the other hand, it also would reduce a big part of the shadow market, especially in places like Southern California."

So, whether we are looking at forecasts for the national economy, the apartment rental market overall, or for mortgage and capital markets--the outlooks from Culkin and other panelists were all mixed at the event, with a lot of clouds in the form of unknowns.

For California, there is little doubt that the markets here will continue to feel the drag of the housing bust more than most US regions, but the pattern is more pronounced in inland metro markets than in coastal areas. However, Southern California will continue to be more affected than Northern California. So said Jay Leupp, managing principal of Grubb & Ellis-Alesco Global Advisors, who served as a panelist in the morning’s first panel session: "Nowhere But Up: What Does the Apartment Market Look Like Post-Recession?"

"Despite the sobering statistics, there just might be a faint light at the end of the tunnel," noted the session’s moderator, Scott Farb, managing principal of Reznick Group. Other panelists included: Randall Zisler, president & CEO of Zisler Capital Associates; Greg Willett, vice president of research and analysis at MPF Research; and GU Krueger, founder of HousingEcon.com.

Just about anybody who has bought real estate in just about any sector over the last three or four years, have probably lost almost all equity in their property, said Farb, "so how is it all going to play out?"

Willett said that "You certainly have not seen these distressed assets come to the market at the pact they were expected to. You are going to start seeing those regional banks go out of business at a reasonably fast pace and it is going to push those assets out there."

When asked how California will fare compared to the rest of the country in 2010, Krueger noted that the demand side looks a little bit weak, however the positive aspect is that the supply side is extremely low. "We are already on the verge of creating a major housing shortage in California," he said. "I think two years down the line will be a nonlinear positive in the apartment market…It could fare better than the rest of the country because of the shortage."

In a panel session titled "Buy-Sell-Hold: What to Do in Today’s Investment Market," panelist Ronald Zuzack, managing director of BlackRock Realty, is beginning to see a turning point on the investment side of the business and believe the bottom will be reached some time in the next six months. "I think investors are sensing that we are getting close to it and are coming back to the market," he said. "Investors should be thinking about taking more risks…We are beginning to see a rebirth of capital coming back into the market."

Zuzack joined moderator Marc Renard, executive director of Cushman & Wakefield Inc.; Michael Katz, co-chief executive officer of Sterling American Property Inc.; Alan George, executive vice president of Equity Residential; Josh Nash, president of the Hanover Co.; and David Robertson, president, CIO and CFO of AIMCO.

"If you buy today then you are getting in early and have the opportunity to create tremendous value," said George. "If you are going to sell today, you are going to sell because you can’t hold."

Katz explained that now is the time to face the facts, look at the recovery and be creative and entrepreneurial. "We are going to see new fundamentals in real estate and we need to recognize that. You have to roll up your sleeves and do the work to get the returns. The debt cannot be solved over night. And it needs to be unwound."