family's curve ball.<@SM>Marcus & Millichap's Hessam Nadji
kicked off the event with a special
LOS ANGELES—Jobs and economic uncertainty were the buzzwords of the morning at the RealShare Apartments 2012 conference, taking place here today. More than 1,700 attendees gathered at the Westin Bonaventure Hotel to hear dozens of industry experts give their thoughts on the state of the multifamily market.
After a brief welcome from Michael Desiato, VP and group publisher of ALM’s Real Estate Media Group, Hessam Nadji took the stage to deliver a special presentation, “Can Apartments Withstand the Economic Headwinds?” the Marcus & Millichap SVP and managing director noted that the organic strength of economy—both corporate and consumer spending—is being held back by political uncertainty. But, he added, the foundation of economy in better shape. The US added 1.8 million jobs between September 2011 and Septeber 2012, though unfortunately the headlines were dominated by the debt and housing crises.
Demand is high and multifamily developers are ready to build, said Nadji, but equity for development is still very cautious and not readily available. “I don’t think overbuilding is going to be a problem through 2014,” he said. Homebuying’s making a comeback as well, though he indicated it wouldn’t cause as much pressure on the rental market as it did in the last cycle. “There’s enough demand for all types of housing.”
Nadji reported that year-to-date apartment investment clocked in at $63.7 billion through the third quarter, with the activity dominated by institutional money. The trends are shifting, however. More money is heading toward secondary markets, as well as properties that are going for between $10 million and $20 million. With capital continuing to flock to quality, he observed, “it creates a lot more opportunity for class B, value-add plays.”
Following the presentation was an expert session, “Anticipating the Curve Ball: What Factors Will Impact the Multifamily Market Next?” Moderated by Scott Farb, managing principal of CohnReznick, the panel featured speakers Tom Bannon, CEO of the California Apartment Association; John Burns, CEO of the John Burns Real Estate Co.; Steve Carlson, president of Steve Carlson & Associates; Property & Portfolio Research’s global strategist, Michael Cohen; and Brannan Johnston, VP and managing director of Experian Rent Bureau.
“This has been the most interesting apartment cycle I’ve seen in decades, and jobs are only playing a moderate role in it,” maintained Cohen. “It’s not as much about jobs as it is secular and cyclical factors, including tepid confidence, tighter lending standards, record levels of student debt, etc.”
The other factor impacting the market is growing demand by non-traditional households. While the attention is going to young adults, Cohen pointed out that one in two renter households these days is middle aged. And if you look at Census data, he noted, one of the biggest cohorts for renter households was single mothers. “Developers are so focused on the echo boom that they’re missing the forest for the trees,” he said.
Burns concurred that to increase the rate of multifamily leasing and meet the needs of the populace, developers need to focus less on luxury development, building smaller units with less expensive finished.
The affordability of rental units is one big problem of this cycle, added Cohen. “In some markets, it’s cheaper to buy than to rent. The demand side of the equation is going to play a big role in next stage of cycle, which I call “Chapter 2.”
Cohen expects a modest increase in interest rates, 130 basis points, over the next five years. But, he warms investors, “The gains we’ve seen in past few years aren’t going to persist because supply is coming on line and the for-sale market is coming back,” he related. While that will help to just balance the market out, “investors must be careful. Even modest increases will have implications on exit caps.”
Burns, meanwhile, believes the country as a whole is not in danger of being built, though some coastal areas will see a glut. And for those looking to complete a sales deal at this point in the market, “prices are rising so much that the buying opportunity is probably gone by now, or will be.”