LOS ANGELES—A steady US economy and net positives in the multifamily sector are keeping prices in the core markets high. And the consensus is that demographics will continue to keep demand for apartments strong. But will apartments continue to ride the wave of these trends for the foreseeable future, or will the momentum abate as the uncertainties—including wage growth, overbuilding and global factors—come into sharper focus?
Expert panelists at RealShare Apartments, a national two-day event at the Westin Bonaventure in Los Angeles, took on those questions and the consensus was that strong apartment demand will continue.
Gary Goodman, SVP of acquisitions at Passco Cos., explained that there is a lot of catching up to do in terms of apartment delivery to keep up with demand. Passco, who buys in secondary and tertiary markets, says they do so because of the job to permit ratio. “We like the right to work states… cap rates are much more attractive,” he said.
Nate Hanks, president and CEO of RealSource, says that in coastal cities, cap rates are too low. But he notes that there is a lot of job growth out there in places other than those markets. RealSource’s focus has been value-add and he still sees opportunity in that space and expects to see it for the next several years.
When panel moderator, Ed Zimbler, senior managing director at Berkadia, asked about wage growth, Hanks expected wage growth to go up over the next five years. “The problem is the affordability index. As we continue to push rents, we expect wage growth.”
If you look at historical job growth, the job growth is actually better than it was pre-recession, explained Goodman. He also pointed out that 31% of renters in Los Angeles and Orange County, for example, pay more than 50% of their income on rent. The places that Passco buys, is a typical ratio closer to 30%.
Jeff Adler, VP of matrix at Yardi Systems, explains that demographics are still very good if you look at the rental cohorts. That, he says, will grow 12% over the next 15 years. “The job formation demographics and continuing to move in a direction that shows significant demand.”
Adler points out that we are at the point where we need to produce 300,000 to 350,000 units a year to keep up with household formation. “On a go forward basis we are keeping up and due to construction lending constraints, we are not getting a crescendo of supply.”
Adler also pointed out that there also aren’t inflationary pressures. “For the next two-three years, we will muddle through. The supply is coming in.”
Adler looks closely at demographic movement and any growth that is happening, he says, will be in the next 30 cities down. “Playing in the first six cities, and playing on a core strategy, you are taking on a risk in that you are betting on international immigration. I am fairly optimistic about where we are. But you are at greater risk below the next 30.”
The other thing about the “sexy six cities” that people talk about a lot, Goodman said, particularly in the urban core, is that city councils have offered incentives to revitalize the central core.
Overall, Adler said, fundamentals for rental demand are good. “The growth beyond where we are at here is going to be in the urbanizing nodes of secondary cities.”
In the primary markets, you will be muddling, says Hanks. But in the secondary markets, there are still parts of the country that are in recovery mode that haven’t over-built and haven’t had huge swings in their rent. “Overall, the country can’t obtain the 5-7% rent growth that we have seen, but it will still grow.”
Check back with GlobeSt.com for more from RealShare Apartments.