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CRE Finance World, Winter 2013

Some Counterintuitive Predictions for Multifamily Properties And while all of the recent housing data releases have been Additionally, it is possible that the appeal of home-ownership has quite promising, we must remember that all of these data points been tarnished by the recent housing market crash. Many of the are recovering from a very low base. Even though some housing younger generation may not see owning a home as the ultimate figures are increasing at double-digit year-over-year rates, they lifetime goal it was once considered. Not to mention that the are rebounding from historic lows. The housing market is by no current high unemployment rate among the young will most likely means firing on all cylinders. Households are still burdened by hinder their employment prospects in the future. Even if they were underwater mortgages and heightened levels of foreclosures to dream of owning a home, constrained budgets and poor credit will continue to be for the foreseeable future. Yes, the market is may necessitate being a renter for years to come. certainly improving as of late. But then again, it doesn’t take much to post improvements given that we are emerging out of an historic Urban areas also offer higher pay and wage growth, which will appeal housing market meltdown. to people of all ages. Following a decade or more of stagnant wages, that is a mighty strong incentive for people to move into or closer Another reason for continued optimism for apartments in the face to cities. While this trend won’t push the apartment demand needle of an improving housing market is the increasing popularity of much higher in any one quarter, it is a powerful tailwind for the urban living. The post-war era in America saw a great migration out sector that should not be ignored. of cities and into the suburbs. Suburban expansion brought with it an explosion in demand for home ownership. The suburbs provided There is no reason to discredit the housing market’s recovery. the parents of the baby-boom generation relatively clean, quiet and Recent improvements have been significant, even if the housing crime-free towns to raise their kids. The proliferation of automobiles market is experiencing a case of lowered expectations given the made suburban living a viable option. relative pain endured in the past five years. However, the housing market poses no imminent threat to the multifamily sector. However, recent trends suggest a reverse migration away from the suburbs back to the cities. There are several explanations for why In fact, it is notoriously difficult to trace a direct correlation between the trend has reversed. Urban areas are no longer the hotbed for single-family home prices and demand for multifamily rentals. crime they once were. The surge in gasoline prices over the past Fundamentals have more to do with supply and demand trends decade has made automobiles a less popular mode of transportation, within each property type than any interaction between them. This with many now favoring the public transportation provided in cities. is why the forthcoming increase in multifamily supply is the bigger worry for most. A greater penchant for urban living is also reinforced by what has been termed the “echo-boom” generation, the children of the baby It’s Not All About Supply boomers. The older portion of this generation is now of age to Much has been written recently about potential risks to overbuilding move out, providing a boost to apartment demand. This will con- in multifamily, but analyzing the supply side is not enough. Demand tinue as more of the echo-boomers enter their early- to mid-20s. for apartments will remain strong, and will rise further if economic growth quickens. The argument can also be made that this younger generation will be more inclined to rent and live in urban areas for longer than Apartment fundamentals have bounced back robustly since the their parents. Life expectancies continue to grow and younger recession ended in June 2009. Despite middling economic growth, people have responded over time by starting a family later in life, the national vacancy rate dropped sharply from a peak of 8% at meaning that they may hold off on purchasing a home in the the end of 2009 to 4.6% in the third quarter of 2012. Vacancy suburbs for longer. rates that are this low have not been observed since late 2001. A publication of Winter issue 2013 sponsored by CRE Finance World Winter 2013 43


CRE Finance World, Winter 2013
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