US Multifamily Industry Disconnected from Lack of Job Growth

Reis, the US real estate research firm, released their 2Q10 report on the revenue fundamentals for the US multi-family industry on 7/7/10, and it confirmed what people in the industry have been saving for a few months; vacancy is declining slowly and rents in most markets are up from the 1st Qtr.

Apartment vacancy nationally decreased 20 basis points to 7.8 per cent in 2Q10, off of the 30 year high in vacancy recorded in the 1st Qtr. Vacancy is little changed from 2Q09, when it was 7.7 per cent. The movement was in rents- nationally up 0.7 per cent vs. 1Q10. This is a big move—if sustained it would indicate rent growth near 3 per cent annually. It is also big in that is seems to add confirmation of a bottoming out of the market. Landlords are translating demand more quickly this cycle into rent increases as a result of the growing adoption of revenue management systems.

Of course, there is a lot of regional variation, although REIS reported that only 10 of the 82 markets it tracks had declining rents sequentially (vs. 1Q10). Rent growth in Washington DC, NY, San Jose, CA, Boston and Seattle seem to indicate the leading roles of finance and technology industries. Markets continuing to slide were Orlando, Baltimore, Phoenix, and Las Vegas… which also tells us that overbuilt single family housing markets continue not to have found a bottom.

Industry pundits, drawing from the leasing staff on site, generally attribute increased demand to the unwinding of “bundling up” of people who had formerly worried about job losses. Other potential contributing factors are the tightening of lending standards despite record low mortgage rates (sub 5 per cent) leading to a declining homeownership rate down to 67 per cent from 69 per cent at the peak which is still falling, and a continued increase in the prime 22-35 age cohort in the US population. Renter applicant quality (as measured by credit scores reported by CoreLogic Saferent, a screening company) continue to deteriorate, albeit slowly, about 1 per cent from a year ago.

That’s the only reasonable explanation, as job growth continues to disappoint. US government figures for June reported only an increase of 83,000 private sector jobs and a 125,000 decrease in temporary US Census workers. Were it not for 650,000 people leaving the workforce, the unemployment rate would have increased well beyond the 9.5 per cent official unemployment rate.

Even as fundamentals begin to be repaired, at least in the multifamily sector, the continued weakness in overall growth, and the flight to the “safety” of US T-bills has resulted in an all-in decline in mortgage debt costs. Centerline Capital, an originator of Fannie Mae and Freddie Mac multifamily loans, reported this week 10 yr rates at 5 per cent, and 7 yr rates at 4.7 per cent. Lowered debt costs and gradually improving fundamentals in many markets have resulted in lower “cap rates” for assets (higher asset prices). Top tier coastal markets are seeing cap rates at 6 per cent and lower, with the national average (as reported by PPR, a CoStar company) at 7.4 per cent. Of course this isn’t true in Orlando, Las Vegas or Phoenix where the destruction in asset values continues. Mitigating value destruction, at least temporarily, is the well know industry trend of commercial banks’ “extend and pretend” philosophy, which has now reached the point where it made the front page of the US Wall St Journal on 7/8/10.

Where does this all lead? Call it the slow grind. Things have stopped getting worse, and are marginally better. Technology is leading the US economy forward, but it is regionally concentrated. With next to zero cost of funds, financial firms are adding both office space and people (recent reports of Manhattan office fundamentals show firming). However, the sheer weight of inertia and fear engendered by other US federal policies is leading to a stall in economic activity.

Rising taxes on everything in sight specifically targeted at the wealth creating group, increased government spending on entitlements and public sector unions, damaged consumer balance sheets, and limited credit availability for small business expansion has led to an “employer’s strike”. This economy is stuck, and the administration is poorly equipped to deal with it, with leaders lacking a basic understanding of wealth creation. While Obama styles himself as a Roosevelt, he is looking more like Jimmy Carter.

A big wallop in November with gains by the Republicans in the House and Senate can lead in either to two very different directions—a moderation along the lines of Bill Clinton in 1994 that led to several more years of growth, or a desperate turn to inflation to generate economic growth along the lines of Jimmy Carter in 1978-1979. Most people in the US fervently hope it does not lead to a repeat of the 1930’s, of Japan’s lost decase of the 1990s.

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