NMHC Economist Sees Favorable Long-term Trends Energizing Multifamily Rentals in 2006
By A. J. Johnson & Caitlin Jones
4 min read
Tax Credit Advisor April, 2006: Buoyed by sound fundamentals, apartment rental housing is poised for a strong year in 2006, according to Mark Obrinsky, chief economist for the National Multi Housing Council.
Obrinskly said that favorable jobs growth, the falloff in competition from singlefamily housing, long-term demographic trends, and a stable supply of apartments all bode well for the multifamily rental sector.
“If conditions hold up through 2006, apartments will enjoy one of the best years they have had in a long time,” Obrinsky said. He spoke last month at the National Housing & Rehabilitation Association’s annual meeting in Miami Beach, Fla.
But the economist also cautioned apartment owners and investors not to expect a return to the boom times of the late 1990s, because jobs growth, while respectable, has remained modest.
Given the subdued employment rebound, “the demand for apartments has gotten better, but it’s been a modest improvement rather than a sharp boom,” Obrinsky said. He noted that job growth did not begin to increase until 2004, and that since then, it has been rising at less than half the monthly rate of the late 1990s.
Excellent Long-term Trends
Looking beyond the issue of jobs growth, Obrinsky said that three long-term trends are quite favorable for the multifamily rental housing market.
First, the cooling of demand for single-family homes – a new trend that is not likely to be reversed any time soon, with interest rates on the rise – means that apartment owners now face significantly less competition in attracting renters. Adding to the multifamily sector’s competitive advantage is the rising gap between homeowners’ monthly mortgage payments and rents charged for comparable apartments. This “premium to buy” has risen from a nationwide average of about $300 in early 2004 to nearly $700 in 2006, Obrinsky noted.
Secondly, favorable demographics suggest that demand for rentals will continue to improve, as strong population growth from the “baby-boom echo” and immigration expands the pool of renters for the foreseeable future.
The number of households headed by renters aged 35 and under is expected to increase by over 5 percent between now and 2010, after falling sharply in the late 1990s, Obrinsky said. The number of new immigrant households is also likely to continue its surge, possibly surpassing the record 9 million recorded during in the 1990s, he said.
Third, the supply side of the apartment rental picture is also favorable. After dramatic increases in the 1980s, and then declines in the early 1990s, new construction of multifamily housing has been quite steady since 1995, the economist said.
“In terms of supply, the last 10 years as been the most stable in history, with booms and busts much less in evidence,” Obrinsky said. “This should continue, with favorable implications for rental housing.”
He also noted that the apartment housing supply has recently been reduced by the conversion of apartments into condos.
Forecast Clouded
Despite the favorable long-term trends, several factors cloud the apartment rental forecast in the nearer term, according to the NMHC economist.
Demand for apartments could fall off if job growth stalls because of an economic slowdown, which could be caused by a spike in interest rates or faltering consumer spending. Obrinsky said he does not foresee a sharp rise in rates in the immediate future à but this could quickly change if foreign central banks do not continue to help absorb the record amount of U.S. Treasury bonds being issued because of budget deficits. Although consumer spending remains fairly strong, it is also vulnerable given Americans’ low personal savings rate, he said.
In addition, the condominium market is cause for concern, Obrinsky said. If it crashes, large numbers of condo owners who have bought units as investments could decide to rent them out, creating a substantial “shadow rental supply” that competes with regular apartment rentals.
“The biggest wild card right now is the what is going to happen with condos,” he said. “This is something to keep an eye on all the time.”
Apartment Turnaround
The NMHC economist said that recently-released data on apartment vacancies and rents charged reveals that a definitive turnaround in the apartment housing market occurred in 2004.
Vacancies spiked at the end of 2003 at about 12 percent, and have steadily declined since then, to under 10 percent at the end of 2005, Orbinsky said. Rental growth has also increased steadily, gaining about three percentage points since 2003. In addition, “net absorptions,” the change in the number of occupied apartments, has improved since 2003, at a rate of about 50,000 a year, he said.
In reviewing the sharp rise in vacancies between 2000 and 2003, the economist noted that a key reason was the loss of renters in their 20s, who decided to “double up” with relatives or roommates. This phenomenon resulted in a loss of approximately 300,000 renters, he said.
