After a Good Year in 2011, Apartment Industry Expects Another One in ‘12

Posted on January 3, 2012

Like any other kind of real estate, the apartment market is a game of numbers, and throughout 2011, the numbers have been on the side of owners, developers and investors. After a turnaround year in 2010—everyone took a licking from the Great Recession, after all—apartments were suddenly in demand in 2011 both by renters and investors, and there’s little doubt that the year will be remembered as one in which the apartment industry fully bounced back not only from the tough recession years, but also the hard times (for the industry) of the mid-2000s, when everyone who could (and many who couldn’t) bought a house.

“Powerful demographic trends, along with changing attitudes about homeownership and tighter mortgage underwriting, continue to drive a shift toward renting,” notes Mark Obrinsky, chief economist at the National Multi Housing Council (NMHC), adding that the industry has responded, after some lag because of tight credit for everyone, with an increase in development.

According to the NMHC’s latest Quarterly Survey of Apartment Market Conditions (released in October), 67 percent of respondents noted considerable activity, either in the planning stage or actual new construction. In particular, 20 percent said developers are breaking grown on new projects at a rapid clip. Yet even with this increased activity, more than half (54 percent) think new development remains considerably below demand.

The demographics Obrinsky spoke of mainly concern the “Echo Boomers” (also known as Millennials), people born between about 1980 and 1995. The leading wave of this group has already started forming households, but seem to be doing so differently from their elders, in that fewer are buying residential property. That’s partly because unemployment is high among adults in their 20s, but also due to a widely noticed attitudinal shift: Owning a home doesn’t quite have the appeal it once did.

Whether that change proves temporary or permanent is impossible to say, but it’s clear that the combination of people who can’t buy a home and the people who don’t want one is driving U.S. homeownership down, to the benefit of the apartment industry. As of the third quarter of 2011, according to the Census Bureau, the percentage of Americans owning their own home was 66.3 percent, off from the all-time peak of 69.2 percent in late 2004.

Those people have to live somewhere. Investment specialist Marcus & Millichap reports that as of the third quarter of 2011, nationwide apartment vacancy was 5.6 percent, down 30 basis points from the previous quarter and 150 basis points from the same quarter in 2010. Asking and effective rents posted annualized gains of 2.1 percent and 2.4 percent respectively during the third quarter. The company also predicts that for the entire year 2011, about 122,000 apartment units will be absorbed–while only 26,000 units have been added by the third quarter.

Will these favorable trends continue? Oliver Chang, an analyst at Morgan Stanley, thinks so, calling 2012 “The Year of the Landlord” in a recent report. “Rents are rising, vacancies are falling, household formations are growing and rental supply is limited,” the report observed. “We believe the demand for rental properties will continue to grow.”

Hessam Nadji, managing director, Institutional Property Advisors, a division of Marcus & Millichap, agrees that 2012 will be good for the industry. “Several macro demand trends will energize U.S. apartment rental markets, including still pent-up demand from the recession, the significant transition from homeownership to rental housing, and demographic strength in the 20- to 34-year-old age cohort,” he tells MHN.

“The cyclical surge in demand that accompanies recovery will transition to a more moderate sustainable expansion in 2012,” Nadji continues. “Higher GDP and stronger employment levels will stimulate immigration—which is critical to rental demand–and Echo Boomers will form new households. The national vacancy rate will approach equilibrium at 5 percent in 2012, as net absorption tallies nearly 106,000 units and overwhelms still-muted supply of 70,000 units.”