MPF Research'sJay Parsons

|

CARROLLTON, TX—My goal in this column is lofty: I hope toconvince every multifamily investor, operator, developer, assetmanager and lender to once and for all—forever and ever—cease anddesist from the idea that home sales are bad for the apartmentsector. And I'll go a step further. I hope to convince you that themultifamily sector should root for a strong for-sale housingmarket.

|

Why would I make such a crazy claim? Because the multifamilyprofessionals continue to buy into a number of myths related tohome sales. At nearly every industry conference, and in manyconversations with clients and reporters, these myths getperpetuated again and again. Chances are, you've heard the same oldtales—and I am willing to bet no one has ever presented you withany real data to back up the conventional wisdom.

|

Here are the top six housing myths on the relationship betweenapartments and single-family homes, backed up by hard facts.

|

Myth #1: If home sales increase, apartment demand willsuffer.

|

You hear this all the time, right? The conventional wisdom saysthere's a finite pool of housing demand, and if more of it goestoward home purchase, then apartment owners will be left with abunch of vacant units—or they'll lose pricing power. Seems logicalenough on the surface. However, if the conventional wisdom weretrue, then at the height of the housing bubble in the mid-2000s, weshould have seen really weak demand for apartments. Right? Lendersand government programs propped up the housing market, essentiallycreating demand through eroding underwriting standards andzero-dollar down payments.

|

So, what did happen to apartments back then? Well, apartmentdemand actually increased right in step with home sales.

|

If it happened then, at the height of an artificial housingboom, we can safely conclude apartment demand isn't negativelycorrelated with home sales. Why? That takes us into Myth #2.

|

|

Myth #2: Apartment owners and operators should fear a stronghousing market.

|

A vibrant for-sale housing market actually benefits theapartment sector. How? When homes are selling, the overall economybenefits, and more demand is created for all housing types.

|

Think about it. You buy a house, you've got a mortgage thatboosts the financial services industry, an insurance policy thatpays the insurance sector. You're paying a real estate agent a nicecut. After you get the keys, you're going to spend some time atLowe's or Home Depot. You may hire some contractors to paint or laynew carpet or do some handyman work. When the housing market isstrong, home prices go up, as do property taxes. That boosts thegovernment, who have never been accused of not doing their part tostimulate the economy by spending tax dollars. And in a hot market,you're building more homes—which boosts a number of otherindustries.

|

This is one reason why our economy was hit so hard in thehousing crisis. So much is tied to the housing market. The NationalAssociation of Realtors estimates that for every two homes sold,one job is created. And the National Association of Home Buildersestimates that nearly three jobs are created for every new homethat's built. Of course, those numbers may be inflated byself-interested parties. But whatever the exact numbers, the impactis undeniable. More jobs equal more housing demand. When thehousing market is strong, chances are the economy is strong—whichis a good thing for all housing types. Yes, you will lose morerenters to purchase in a strong housing market; however, you'regoing to be able to backfill those units quickly.

|

Myth #3: Suburban apartments will underperform due to theirexposure to home sales.

|

Not true at all. For one, the best suburbs historically haveoutperformed urban submarkets in terms of both rent growth andinvestment returns, as we laid out at length in this researcharticle. Second, conventional wisdom says urban apartments willretain renters at a higher rate since they cater to “lifestyle”renters. But that's not backed by the data, either. Suburbsconsistently have higher retention rates than urban apartments,according to our analysis of rent rolls from a subset of the 11million units serviced by RealPage Inc. Of course, retention isn'teverything, but it's notable because the multifamily industry isobsessed with the move-outs-to-home-purchase stat.

|

Will suburban apartments lose more renters to purchase than anurban asset? Absolutely. But does that matter? Not at all. Turnoveris turnover, and urban assets have higher turnover due to far morecompetition from new supply and due to the nature of transienturban renters to remain, well, transient. Some will argue thaturban apartments can backfill units more quickly, but that's onlytrue when compared to lower-tier suburban assets – especially inslow-growth markets. Our research has shown the best suburbs(higher-rent areas in growth markets) consistently match urbanareas in new lease applications per vacant unit.

|

If you're a REIT with a suburban Sun Belt portfolio, next timean analyst asks you about the loss of renters to home purchase,remind them of the facts. This is a big reason why Wall Street hasperpetually undervalued suburban and Sun Belt assets.

|

Myth #4: Apartments are thriving because of the housingbust.

|

It's widely assumed that the foreclosure crisis and subsequentdrop in homeownership drove people out of single-family homes andinto apartments. But that's not what happened. Last year, theMortgage Bankers Association put out a great research report onhousing demand. The report showed that the drop inhomeownership—particularly among Americans between the ages of 25and 44—has led directly to a boost in single-family rentals. Infact, the share of 25- to 34-year-olds renting single-family homesjumped from 16% to 22% between 2004 and 2014. In the 35- to44-year-old group, the rate climbed from 11% to 18%. In both agegroups, the share renting multifamily units inched up only 2 to 3percentage points over the past decade.

|

Households that went through foreclosure or haven't been able tobuy their first home for whatever reason, most of them aren'tsticking around in apartments. They're renting single-familyhouses.

|

Myth #5: Millennials' unique housing preferences are drivingthe apartment boom.

|

The fourth myth flows right into Myth #5. It's true thatMillennials are driving the apartment boom, but not because of aphobia to single-family houses. Yes, Millennials are gettingmarried later and having children later. But those differenceshaven't translated to a higher share of young adults living inapartments compared to prior generations at the same age. The MBA'sreport showed that back in 1994 (when the oldest Millennials werestill kids), 39% of the 25- to 34-year-old group rented amultifamily unit. The share fell to 35% in 2004 and clawed back upto 37% by 2014. So, the share hasn't changed much – and is actuallydown slightly from 1994 levels.

|

What has changed, though, are the raw numbers behind thosepercentages. The U.S. added 4.3 million more 25- to 34-year-oldsbetween 2004 and 2014, according to the Census. If 37% are rentingmultifamily units, population growth alone accounts for anadditional 1.6 million young adults moving into multifamilyrentals. It's simple math.

|

Myth #6: People use rent-or-buy calculators to make housingdecisions.

|

When real estate professionals start sweating over the costs ofrenting apartments versus buying houses, they enter the theoreticalworld of Economics 101, where consumers make rational, objectivedecisions free from subjective stuff like emotions and preferences.The problem with this, though, is it's not how the real worldworks.

|

Have you ever met someone who actually sat down at their kitchentable and crunched the rent-or-buy numbers in advance of making ahousing decision? Even if you were agnostic to the flexibility ofrenting versus the pride of homeownership, a number of factors(location, square footage, amenities, condition etc.—and the valueyou place on each variable) quickly transform simple math intocomplex financial analysis. Furthermore, most rent-or-buycalculators live on websites that make their money from real estateagents, so they tend to conveniently exclude homeownership's peskyongoing expenses like taxes, insurance, maintenance, HOA dues andPMI.

|

For all these reasons, lifestyle and life stage are often thefirst variables in choosing between multifamily and single-family.This isn't to say money isn't a factor. Of course it is. But therent-or-buy calculations are far more important to someone decidingbetween renting or owning a single-family home.

|

Jay Parsons is VP with MPF Research, the market intelligencearms of RealPage Inc. The views expressed here are the author'sown.

|

MPF Research'sJay Parsons

|

CARROLLTON, TX—My goal in this column is lofty: I hope toconvince every multifamily investor, operator, developer, assetmanager and lender to once and for all—forever and ever—cease anddesist from the idea that home sales are bad for the apartmentsector. And I'll go a step further. I hope to convince you that themultifamily sector should root for a strong for-sale housingmarket.

|

Why would I make such a crazy claim? Because the multifamilyprofessionals continue to buy into a number of myths related tohome sales. At nearly every industry conference, and in manyconversations with clients and reporters, these myths getperpetuated again and again. Chances are, you've heard the same oldtales—and I am willing to bet no one has ever presented you withany real data to back up the conventional wisdom.

|

Here are the top six housing myths on the relationship betweenapartments and single-family homes, backed up by hard facts.

|

Myth #1: If home sales increase, apartment demand willsuffer.

|

You hear this all the time, right? The conventional wisdom saysthere's a finite pool of housing demand, and if more of it goestoward home purchase, then apartment owners will be left with abunch of vacant units—or they'll lose pricing power. Seems logicalenough on the surface. However, if the conventional wisdom weretrue, then at the height of the housing bubble in the mid-2000s, weshould have seen really weak demand for apartments. Right? Lendersand government programs propped up the housing market, essentiallycreating demand through eroding underwriting standards andzero-dollar down payments.

|

So, what did happen to apartments back then? Well, apartmentdemand actually increased right in step with home sales.

|

If it happened then, at the height of an artificial housingboom, we can safely conclude apartment demand isn't negativelycorrelated with home sales. Why? That takes us into Myth #2.

|

|

Myth #2: Apartment owners and operators should fear a stronghousing market.

|

A vibrant for-sale housing market actually benefits theapartment sector. How? When homes are selling, the overall economybenefits, and more demand is created for all housing types.

|

Think about it. You buy a house, you've got a mortgage thatboosts the financial services industry, an insurance policy thatpays the insurance sector. You're paying a real estate agent a nicecut. After you get the keys, you're going to spend some time atLowe's or Home Depot. You may hire some contractors to paint or laynew carpet or do some handyman work. When the housing market isstrong, home prices go up, as do property taxes. That boosts thegovernment, who have never been accused of not doing their part tostimulate the economy by spending tax dollars. And in a hot market,you're building more homes—which boosts a number of otherindustries.

|

This is one reason why our economy was hit so hard in thehousing crisis. So much is tied to the housing market. The NationalAssociation of Realtors estimates that for every two homes sold,one job is created. And the National Association of Home Buildersestimates that nearly three jobs are created for every new homethat's built. Of course, those numbers may be inflated byself-interested parties. But whatever the exact numbers, the impactis undeniable. More jobs equal more housing demand. When thehousing market is strong, chances are the economy is strong—whichis a good thing for all housing types. Yes, you will lose morerenters to purchase in a strong housing market; however, you'regoing to be able to backfill those units quickly.

|

Myth #3: Suburban apartments will underperform due to theirexposure to home sales.

|

Not true at all. For one, the best suburbs historically haveoutperformed urban submarkets in terms of both rent growth andinvestment returns, as we laid out at length in this researcharticle. Second, conventional wisdom says urban apartments willretain renters at a higher rate since they cater to “lifestyle”renters. But that's not backed by the data, either. Suburbsconsistently have higher retention rates than urban apartments,according to our analysis of rent rolls from a subset of the 11million units serviced by RealPage Inc. Of course, retention isn'teverything, but it's notable because the multifamily industry isobsessed with the move-outs-to-home-purchase stat.

|

Will suburban apartments lose more renters to purchase than anurban asset? Absolutely. But does that matter? Not at all. Turnoveris turnover, and urban assets have higher turnover due to far morecompetition from new supply and due to the nature of transienturban renters to remain, well, transient. Some will argue thaturban apartments can backfill units more quickly, but that's onlytrue when compared to lower-tier suburban assets – especially inslow-growth markets. Our research has shown the best suburbs(higher-rent areas in growth markets) consistently match urbanareas in new lease applications per vacant unit.

|

If you're a REIT with a suburban Sun Belt portfolio, next timean analyst asks you about the loss of renters to home purchase,remind them of the facts. This is a big reason why Wall Street hasperpetually undervalued suburban and Sun Belt assets.

|

Myth #4: Apartments are thriving because of the housingbust.

|

It's widely assumed that the foreclosure crisis and subsequentdrop in homeownership drove people out of single-family homes andinto apartments. But that's not what happened. Last year, theMortgage Bankers Association put out a great research report onhousing demand. The report showed that the drop inhomeownership—particularly among Americans between the ages of 25and 44—has led directly to a boost in single-family rentals. Infact, the share of 25- to 34-year-olds renting single-family homesjumped from 16% to 22% between 2004 and 2014. In the 35- to44-year-old group, the rate climbed from 11% to 18%. In both agegroups, the share renting multifamily units inched up only 2 to 3percentage points over the past decade.

|

Households that went through foreclosure or haven't been able tobuy their first home for whatever reason, most of them aren'tsticking around in apartments. They're renting single-familyhouses.

|

Myth #5: Millennials' unique housing preferences are drivingthe apartment boom.

|

The fourth myth flows right into Myth #5. It's true thatMillennials are driving the apartment boom, but not because of aphobia to single-family houses. Yes, Millennials are gettingmarried later and having children later. But those differenceshaven't translated to a higher share of young adults living inapartments compared to prior generations at the same age. The MBA'sreport showed that back in 1994 (when the oldest Millennials werestill kids), 39% of the 25- to 34-year-old group rented amultifamily unit. The share fell to 35% in 2004 and clawed back upto 37% by 2014. So, the share hasn't changed much – and is actuallydown slightly from 1994 levels.

|

What has changed, though, are the raw numbers behind thosepercentages. The U.S. added 4.3 million more 25- to 34-year-oldsbetween 2004 and 2014, according to the Census. If 37% are rentingmultifamily units, population growth alone accounts for anadditional 1.6 million young adults moving into multifamilyrentals. It's simple math.

|

Myth #6: People use rent-or-buy calculators to make housingdecisions.

|

When real estate professionals start sweating over the costs ofrenting apartments versus buying houses, they enter the theoreticalworld of Economics 101, where consumers make rational, objectivedecisions free from subjective stuff like emotions and preferences.The problem with this, though, is it's not how the real worldworks.

|

Have you ever met someone who actually sat down at their kitchentable and crunched the rent-or-buy numbers in advance of making ahousing decision? Even if you were agnostic to the flexibility ofrenting versus the pride of homeownership, a number of factors(location, square footage, amenities, condition etc.—and the valueyou place on each variable) quickly transform simple math intocomplex financial analysis. Furthermore, most rent-or-buycalculators live on websites that make their money from real estateagents, so they tend to conveniently exclude homeownership's peskyongoing expenses like taxes, insurance, maintenance, HOA dues andPMI.

|

For all these reasons, lifestyle and life stage are often thefirst variables in choosing between multifamily and single-family.This isn't to say money isn't a factor. Of course it is. But therent-or-buy calculations are far more important to someone decidingbetween renting or owning a single-family home.

|

Jay Parsons is VP with MPF Research, the market intelligencearms of RealPage Inc. The views expressed here are the author'sown.

|

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