Shared post from Axiometrics | by Louis Rosenthal

The apartment market is always changing. What was popular in the 1980s is a relic today. While today’s renters enjoy the amenities and locations featured at newer properties, changing economies, culture, technologies and interests will make the apartments of the future different.

So what does the medium- and long-term market look like? What should renters, investors and economists know about it in 2025, 2035 or even 2050? This isn’t an idle exercise: While the forces of supply and demand don’t change, the drivers of supply and demand do. In that sense, as we move farther into the future, observers should be keen to demographic and generational changes, technological disruptions and shifting market dynamics.

Starting with demographic and generational changes, the prime renter age group for the next decade or more will be that much-discussed millennial generation. We consider the prime-renter group to include those ages 20-34. If we consider millennials to be anyone born between 1980 and 2000, then the oldest millennials will be 40 years old in 2020, when some of the youngest millennials will be 20. In other words, the youngest of the millennials will still be considered “prime renters” until 2035. Some may think they are entitled, bratty and materialistic — but they will be driving the apartment market for at least the next 20 years.

Consider this: 27% of millennials ages 18-33 have a bachelor’s degree or higher, compared to only 20% of the previous generation, Gen X, according to Pew Research. Only 28% of adult millennials are married, compared to 38% for Generation X when they were 18-33 years old. Perhaps more interesting is how millennials approach the two most expensive assets they will likely ever own: houses and cars.

In 2014, 76.7% of 20-24 year-olds had a driver’s license, compared to 82% of 20-24 year-olds in 2008 and 91.8% in 1983. Over the course of 30 years, the number of young 20-somethings with a driver’s license fell dramatically.  Clearly, the brakes have been put on the car culture that defined Americana in the post-war years. Likewise, only 35% of those 34 and younger own a home, compared to 39% in 2010 and 41% in 2000. In short, Millennials are less interested in driving a car and — at least for now — owning a home.

So what do these trends mean for the apartment market? The homeownership rate is of particular importance because people are classified as either an owner or a renter.

“If the homeownership rate goes down, then the number of renters should go up,” said Jay Denton, Axiometrics Senior Vice President of Analytics. “So, in the end, a declining homeownership rate should benefit the multifamily space, especially given demographics.”

Technology also will be different in the apartment of the future.

Transportation technologies are likely to completely upend the way we think about getting around the city. As driverless cars and Uber-like ride-hailing services become the norm, declining rates of car ownership, more disposable income and the repurposing of America’s 40,000+ parking garages and lots (about 800 millionparking spaces) should follow. This will mean a major change in the physical space that an apartment property occupies, as well as its immediate vicinity. The parking lots could be repurposed into another building or more green space in urban “jungles.”

This, too, ties back into demographic trends: Do millennials want a parking space or do they want adjacent retail shops, movie theaters, restaurants and so on? If it’s the latter, we can safely assume that apartments — particularly those located in urban core areas — will be even more attractive to young renters.

Of course, the economy is a large factor in driving housing decisions. Job growth is the key variable that predicts apartment rent and occupancy growth. When the number of jobs grows in a particular metro, more people come to the metro to take those jobs — and a sizable portion of those job-holders will be renters. In short, when the economy is doing well, so is the apartment market.

So, when we think about the future economy, we need to consider the role of demographics and the business cycle. Starting with demographics, Denton said: “Our country is based on growth, and if you look at millennials, they are waiting longer to have kids, and when they do they are having fewer of them. That means we are not building up our population enough, so we will have to draw on people from other countries.”

In other words, if we are not increasing the population today, then future demand for apartments will suffer as fewer individuals occupy that prime renter age group.

Never far from anyone’s mind is the threat of another recession. As Denton described, “If the economy takes another downturn in the next two or three years, is that another black eye for the single-family home industry? Does the single-family space get hit with a double whammy?”

Another recession in the near future could have two medium- and long-term effects.

• In the medium-term, it will only further sour younger Americans on homeownership. What is the point in trying to build home equity if there is a deep downturn once a decade?
• The long-term effects could be similar, but their impact will be protracted: For the youngest millennials alive today, what does it mean to have your formative years colored by deep recessions? Will single-family homes become even less desirable than they might be for the older millennials? Time will tell.

The future is unknowable, and we aren’t presumptuous enough to say that we have some special insight into what the future holds for the apartment industry. We can forecast the key supply and demand variables in the apartment market five years into the future, and we can do so with a considerable degree of accuracy.

But all predictions are necessarily imperfect. What analysts and observers should be doing is asking the sorts of questions raised in this post: questions about the replicability of historical trends, demographic changes, technological disruptions and so on.

All the better to ask these questions now so that the future can be accommodated rather than resisted.

Shared post from Axiometrics | Contributed by KC Sanjay

Great Britain voters decided on June 23 to leave the European Union. The somewhat surprising 52%-48% result — the “remain” side had a narrow lead in the final pre-vote polls — was capped by Prime Minister David Cameron’s announcement that he would resign.

Analysts are mixed about the effect the “Brexit” from the EU will have on the British economy, but the decision could make an impact on apartment investment in the United States, Axiometrics economists say.

International investors have been increasing their holdings in the U.S. over the past several years, as they have gained a better understanding of the American apartment market and appreciation of the sector’s profitability. Before recently, the idea of professionally managed properties of 300 units or more just didn’t translate.

But international investors sunk $16.3 billion into U.S. multifamily in 2015, about 11% of the record $150 billion worth of transactions in the sector, according to Real Capital Analytics (RCA). While Canadian investors provided the lion’s share of that international money ($11 billion), those from Great Britain had the second highest concentration at $2 billion.

The Brexit could decrease the value of British real estate, at least in the short term, as the United Kingdom attempts to first negotiate its way out of the EU, then seeks new trade deals on its own. That could send British speculators looking for someplace safe to spend their investment pounds and shillings, and the United States has one of the most attractive apartment markets in the world, according to Axiometrics economists.

Multifamily – comprising apartments, condominiums, student housing, senior housing and other products – is one of the five primary commercial real estate sectors, along with retail, office, industrial and lodging. The sector accounted for 25%-30% exposure of all commercial real estate portfolios in 2015 and the first quarter of 2016 – meaning multifamily is bringing in more than its share of investment compared to other sectors.

Meanwhile, the U.S. government made international investment in America easier by easing the tax burden on many of these deals. For example, a non-U.S. investor can now own up to 10% of a REIT before incurring federal taxes – up from 5%. This December 2015 action also exempts certain foreign pension funds from taxes from their U.S. property holdings.

Not only might British investors seek safety in the United States, but patrons from other nations could look to shift some investing from Britain to the U.S., according to Axiometrics’ economic analysis. London and New York, in that order, are the most popular locations for international investment. A weakened London market could spur more money toward New York, where 32% of 2015 multifamily investment was from outside the U.S., according to RCA.

Investors from the Middle East, who have long favored London, could be ready for a bigger bite of the Big Apple if they see profitability falling in Great Britain.

On the other hand, a post-Brexit British recession – one of the potential scenarios prophesied by economists – could depress U.K. apartment values so much that U.S. investors might see a “buy low” play overseas and spend some investment dollars on London flats.

Cameron bucked many of his Conservative Party patrons by urging his constituents to vote to remain in the EU, a position also held by much of the Labour Party and U.S. President Barack Obama. The rapidly emerging United Kingdom Independence Party (UKIP) is among the most vociferous supporters of the “leave” movement. The political ramifications beyond Cameron’s resignation could be significant.

Had voters followed Cameron’s lead and elected to remain in the EU, international investment in U.S. multifamily would have likely remained on its current trend line: Steadily increasing as market strength and investment conditions improve.

Read more from Axiometrics online

Contributed by Dave Sorter, Axiometrics

The expected moderation that occurred in the national apartment market during the past two quarters was the result of many factors – a wealth of supply entering the market, regional economic conditions and unsustainably high rent growth among them.

When annual effective rent growth and occupancy rates decline, it can be difficult to remember that just a few months earlier, the sector was in the midst of its strongest period since at least the start of the Great Recession.

Just as a presidential election is, with the Electoral College, the aggregation of 51 state/federal-district elections, national apartment performance is a compendium of hundreds of metro markets throughout the country. Obviously, larger cities have more apartments and have greater weight in the national averages.

The recent moderation has been largely the result of sharp decline in many of the largest metros in the nation. Some of them, such as Houston, have suffered from economic woes combined with a glut of new supply. Others, such as San Francisco and Denver, also experienced lower job growth near the end of 2015, but had such high effective rent growth that it had to decrease eventually.

And the largest market, New York, has also sustained significant rent-growth decline in the past half-year. Other very large metros, such as Atlanta, Dallas and Los Angeles, have neither increased nor decreased significantly. In fact, no really primary market is in the fast lane of growth.

As rent growth in these metros declined or maintained, however, the metrics started surging in smaller markets. Sacramento has seen an exceptional increase in annual effective rent growth in the past six months, and Salt Lake City has made its way into the top 10 among metros with the highest rent growth. Long Island and Newark are no longer playing second fiddle to the Big Apple.

A look at year-to-date effective rent growth in some of these markets tells the story of how some larger markets have moderated while some smaller markets have strengthened.

San Francisco, for example, combined with Bay Area neighbors Oakland and San Jose to comprise three of the five highest rent-growth metros for much of the first half of 2015. But the chart below shows that, come September, 2015 YTD rent growth for San Francisco apartments dropped from the second-highest figure since the recession to the lowest. As of March, 2016 YTD rent growth also is at a post-recession low.

Denver had a similar end to 2015, finishing with its lowest YTD rent growth of the recovery – though 5.6% was fairly robust. Things were looking the same through the first two months of 2016, with negative YTD rent growth in January, though a strong March rebound moved Denver apartments out of the post-recession basement.

Houston apartments, still sustaining minimum job growth as a result of a weakened oil industry, had negative YTD rent growth in March for the first time since the recession ended. This following a 2015 that beat out only 2010 among the post-downturn years.

Sacramento is on the other end of the spectrum. After experiencing some lean years during the early part of this decade, this metro’s 2014 and 2015 were the strongest of this cycle. This year is on the same track, with March’s YTD effective rent growth for Sacramento apartments some 80 bps above the next-highest March, in 2012.

And while Salt Lake City’s March 2016 YTD rent growth is the third-highest of the post-recession period, it was the highest since 2013 and continued the trend started in the second half of 2015, when the metro avoided the common fourth-quarter dip and climbed to tie for the highest year-end rate of the decade for Salt Lake City apartments.

With annual effective rent growth either declining or relatively stable in most major markets over the past half-year, it follows that the national market would mimic that trend. The smaller markets are somewhat offsetting the moderation of their bigger brothers and are on pace to continue to do so, as national rent growth is forecast to average 3.5-4% this year.

Dave Sorter

Dave Sorter is an award-winning journalist who spent 30 years as a newspaper reporter and editor before joining Axiometrics. He oversees all Axio blogs and newsletters and serves as senior editor of all Axio publications.

The rent growth of asset classes — especially Class A — could predict movement for an entire apartment market.

Contributed by Dave Sorter, March 21, 2016

Many factors enter into forecasting future performance of apartment markets, but often, the movement of asset classes’ annual effective rent growth is a possible indicator of short-term trends.

The direction in which Class A properties are headed can be especially prescient. If rent growth in the apartment communities in this class, representing the 20% highest rents in a market or submarket, begin trending upward, the metro as a whole will likely see a spike within the next couple of months. Class C represents the 20% lowest rent in a market or submarket, while Class B includes the rest.

Conversely, a couple months of sharp Class A rent-growth decreases could indicate the metric will enter a period of decline.

Class A properties are usually the newest, shiniest projects, as well as the most expensive. So increases in Class A rent growth often are signs of a strong metro economy with good job growth and moderate new supply. Class A rent growth has an inverse relationship with new supply.

Class A rent is driven by high-paying jobs, primarily in technology, education and health. Classes B and C, however, fall into the category of “workforce housing.”

Axiometrics looked at two metros that experienced significant rent-growth strengthening in the second half of 2015 and the first two months of 2016, and three other markets with quicker-than average declines. In most cases, class movement was a portent of the trend to come.

The Austin apartment market was at a low point of this cycle early in 2015. Possible oversupply in the urban-core Central submarket somewhat counteracting excellent job growth to reduce annual effective rent growth to less than 4% for the first time since mid-2013. But looking at class trends, Class A was on the way up starting in January 2015 and climbed steadily through August 2015.

Austin started to re-emerge in April 2015, and rent growth surpassed the national average in July.

Job growth remained strong in Austin, and rents had dropped enough in the urban core by March 2015 that they were now affordable to more people, increasing absorption. In addition, suburban submarkets continued to strengthen. The Central submarket still has almost flat rent growth and construction is continuing there, but landlords there don’t have to lower rents as much as they did, allowing the suburbs to drive robust growth.

Sacramento – another high job-growth metro – climbed within 5 basis points of having the highest annual effective rent growth among Axiometrics’ top 50 apartment markets in February and was one of only two of those 50 metros to surpass 8% rent growth, much less double digits.

Unlike Austin’s steady climb, Sacramento’s rent-growth journey has been volatile, as have the asset classes – though rent growth has been an elite 7.9% or higher since June 2014. Its February rent growth was the highest of this apartment cycle – by just 1 basis point over the previous high in May 2015.

The most recent surge began in December 2015, and February’s rate was 150 basis points above November’s. Yet, Class A rent growth began surging in November, and Class C in October.

Houston, Denver and San Francisco have had the most publicized decreases in annual effective rent growth over the past nine months. In San Francisco’s and Denver’s cases, unsustainably high performance combined with decline in job growth caught up with the markets. Job losses caused by the steep decline in oil prices along with undebatable oversupply in the urban-core Montrose/River Oaks submarket can be blamed for Houston’s recent performance.

Houston rent-growth has decreased for 13 of the past 14 months as of February, but the downward trend for Class A (and Class B) began in November 2014 – two months before the metro decline began. Both of the two higher asset classes have been constantly sliding since then, with Class C a little more volatile.

San Francisco was among the top 5 for annual effective rent growth for most of 2014 and 2015, with rates above 11% as recently as September 2015. But the decline from such heights came swiftly, though at 4.7% in February, rent growth is still strong.

Class A started its downward pattern in August 2015, even as the metro rate was continuing to increase. Though Class A rent growth rebounded in September, the other two primary asset classes were starting a descent. Class A’s September strength was a last gasp for the year, as that rate decreased precipitously along with the metro’s through December.

But, as the chart below shows, Class A rent growth has increased slightly during the first two months of 2016. Is that a sign that San Francisco may have hit its valley and rent growth will begin climbing again? Tune in next month.

Denver was another top 5 rent-growth markets during parts of 2015, but declining job-growth rates overall and in most sectors – even though only Information actually lost jobs last year – and affordability issues resulted in a decline to the extent that Denver underperformed the nation in February. That hadn’t happened since December 2009, when the apartment market was in its recessionary tailspin.

The metro’s rent growth began declining in July 2015, but Class A foreshadowed the trend by starting its moderation in May 2015. Classes B and C soon followed.

Though certainly not the only indicator, asset class trends often can predict what will happen in an apartment market in the short term, with a month or two lag. That’s one reason that monthly market intelligence is so important when analyzing individual metros and properties.