Oasis in a dry economy

A jobless recovery. "Absurd," you say? Not in the apartment world, leaders of four of the country's largest multifamily REITS said at mid-year. And they had the numbers to prove it.


“Increased renter demand from the baby boom echo, falling home-ownership rate and historically low new supply almost offset the worst drop in employment in over 60 years,” said Camden Property Trust CEO Ric Campo, who expects the nationwide apartment REIT’s same-store NOI to see positive year-over-year numbers in Q4.

“This cycle, which included the Great Recession, produced a peak-to-trough revenue decline in our portfolio of eight percent and an NOI decline of 10.5 percent. It lasted for six quarters and came with a total employment loss of 8.4 million jobs. By comparison, during the 2001 to 2003 downturn, our portfolio experienced a roughly six percent revenue decline and an 11 percent NOI decline. It lasted five quarters and we lost a total of 2.7 million jobs,” he said.

Back in the bad old days of 2003, when the apartment industry was in the doldrums and renters were leaving in droves to buy homes in an ultra-permissive, no-docs/no-down environment, Campo sat on a panel at a Los Angles conference. The moderator asked what it would take to get the apartment industry back on its feet.

“Jobs. Jobs. Jobs,” was the one-word answer that echoed down the table. Today, Campo and many of his peers are saying that employment growth — historically considered the lifeblood of the multifamily rental world — may not be the industry’s only salvation. Today, it’s a whole new equation.

“Despite the loss of 5.7 million more jobs than the 2001 recession, our revenue decline was only two percent worse. Given the close historical relationship between employment growth and revenue performance, this is truly remarkable,” he said, crediting the change in home-ownership psychology for much of the improvement.

UDR CEO Tom Toomey agreed, declaring the rent-versus-own balance has swung in multifamily’s favor. Home-ownership rates that may drop to 64 percent from 67 percent over the next three years, would send between four and five million people back to the renter pool, he estimated.

“If that trend continues and the psychology of that equation of rent-versus-own continues to come our direction, we probably have some ability to continue to grow rents just off of that,” Toomey said of what Campo called “a mini-tsunami” of potential new renters.

While AvalonBay CEO Bryce Blair assured analysts that he and his team were not trying to minimize the importance of job growth to the economy, he reminded everyone listening in on the mid-year earnings call that there was no job growth in the early part of the decade, when single-family home prices were rising.

“So, why is it such a hard thing for us to imagine that rent rates can rise in the face of no job growth?” he wondered, adding that such an unparalleled turn of events probably is not sustainable over the long-term.

It’s the first time in his 26-year career in multifamily that he’s seen home-ownership rates fall so precipitously, along with the positive benefit of the demographics, he said, listing elements peculiar to this apparently jobless recovery.

“It’s a number of factors happening at the same time, which are causing our reliance on jobs to be a little less important than in prior times,” he said, predicting that a drop to that magical 64 percent home-ownership level, which Barron’s forecast could happen by 2015, could result in 3.5 million additional renters coming into the rental pool, at a rate of around 700,000 a year, from that catalyst alone.

“It’s hard to overemphasize the positive impact that the weak for-sale housing market has and will likely continue to have on the rental market,” he said, reporting that home-ownership rate in the U.S. dropped just below 67 percent during the second quarter of this year, the lowest rate in more than 10 years.

“It’s likely that changes in the for-sale market may have an even larger impact than job growth on the strength of the apartment markets in coming years,” he said.

In addition, Blair said, multifamily rental starts for the first half of 2010 are running at an annualized rate of about 70,000 for the year. That level of new apartment production is only about a third of the historical average and is about equal to the annual loss of apartments demolished due to obsolescence.

“Given that there was a similarly modest level of apartment starts in the second half of ’09, it will be the equivalent of net zero deliveries of new multifamily product in 2011 and 2012,” he said.

Campo agreed, reporting, “We’re actually destroying the standing inventory of multifamily by building 80,000 apartments, while tearing down 150,000. I think those two things combined are fairly big-ticket drivers and will continue well into the 2011 and 2012 time frame.”

EQR EVP of Property Management Fred Tuomi said, in his answer to an analyst during the country’s largest apartment REIT’s mid-year earnings call, that the zero-supply phenomenon may soften the degree of change between the good leasing months and normally slow leasing seasons.

And, he said, dramatically reduced turnover is another factor countering the impact of slow job growth. “We’re down 700 basis points from 2008 this quarter,” he said at the end of July. “That’s a dramatic shift and I don’t think I’ve ever seen in this industry a move that big in a key statistic like turnover,” he said.

“People aren’t buying homes, they’re not moving for jobs. You don’t have the society rotation going on and I think people are comfortable with where they are,” he said of EQR’s renters.

The only renters unlikely to stay put right now are those who improved their style of living when rents, especially new move-in rates, dropped dramatically over the past two years, sometimes as much as 10 percent from their peaks, while apartment companies gave up revenue to maintain occupancy.

Now that Equity Residential, like most other apartment REITs, is aggressively pushing rents, those who took advantage of the rent decline to move up to more luxurious dwellings may not want to pay those higher rates.

“That’s natural. And we will replace them with people who are willing to pay that rate,” he predicted, with a proviso that will depend on how things play out over the next several quarters. “But, what we see on the ground today on the turnover, the renewal and the pricing pieces, again, it’s all very favorable,” Tuomi said.

In addition, the unbundling trend that began to make a difference early this year strengthened over the first half, because people are less afraid of losing their jobs and more weary of roommates’ increasingly annoying habits, sleeping on a friend’s couch or living with Mom and Dad.

“I think the unbundling will continue into 2011, but there’s less hard evidence around that,” said Campo, adding that there is a lot of convincing anecdotal evidence and some pretty good data in the company’s portfolio records that the phenomenon continues unabated.

From the end of 2008 through the middle of 2009, those under 30 lost their jobs at a higher rate than their elders. People coming out of college couldn’t find jobs at all. “You were having layoffs, layoffs, layoffs and all this news about layoff,” said Camden’s CEO. “Today, you don’t have massive layoffs going on. You don’t have that psychological aspect of everybody losing their jobs.

“What’s happening, then, is people — even with the jobless recovery — are not worried about losing their jobs and that is a positive thing for the unbundling,” he said, estimating that, if 45 percent of the under-30 renters Camden lost when those renters lost their jobs, came back, the REIT would see 6,000 returning tenants.

“So, when you think about that, I don’t think you need a massive amount of jobs. What I think you need is positive psychology within that group and that comes from not worrying about losing their jobs, more than it does from adding jobs. You put jobs on top of that, and then you get robust growth, as opposed to just decent growth from the unbundling,” said Campo.

And Camden President Keith Oden added that the people who lost their homes to foreclosure but still have jobs are in a growing pool of down-the-fairway renters. The home-loss scenario continuing across the country likely won’t play out until sometime in 2012 or 2013, he said.

The preponderance of those people likely will find new homes in single-family rentals, but Oden expects some one-third will end up in multifamily. “It’s a pretty powerful trend that doesn’t really require anything else to happen on the job front,” he said.

And Blair wrapped up the prevailing sentiment about the on-going jobless recovery in the apartment world pretty well when he concluded, “Whether it’s a modestly improving economy, falling home-ownership rates, positive demographics or an anemic level of new product, it’s hard not to feel positive about the impact on rental fundamentals, this year and increasing into 2011 and 2012.”