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Yardi analyst: Apartment outlook looks bright


The average monthly apartment rent reached a record high in August, coming in at $1,414, up 3.1 percent annually nationally. In some cities, however, such as Seattle and San Francisco, rent growth has slowed. Doug Ressler, director of business intelligence for Yardi Matrix, discussed trends in the market and why he sees a bright future for apartment rentals, even if the economy turns down.

How healthy is the apartment sector in terms of rental growth?

dougresslerIt is very healthy right now. It represents one of the most opportune investment models that currently exist, in terms of return and also the low amount of risk. 

Why is that?

What you see is not only a changing pattern in terms of homeownership, but you're also seeing a changing demographic pattern in terms of different groups wanting to rent as opposed to buy. Yes, [rent] continues to climb. Even if you take out of the equation inflationary pressures, net present value, things like that, you are going to see a rise in the rental rates. Lack of supply is certainly one of the elements that is driving it. But also, at the same time, it is the changing demographic as well in terms of homeownership that I mentioned before.

Yardi’s studies, though, suggest that rent growth has slowed considerably in a few metros. What is going on in those cities?

What we see is a small softening in [rents] in terms of discretionary [renters of typically higher-end apartments], the people who can afford to buy, but choose to rent. We see that some of that has softened a little bit in some markets. We see transmigration patterns from the Northeast to the South, as aging occurs in some of the Northeast markets. You see people moving to markets where you have lower costs. On a median income that is lower, you can have housing much more readily, especially in the Southeast or the Southwest.

So, in other words, some cities have seen an exodus of people and that has softened demand in some cities?

It could be, but in a place like New York or the San Francisco Bay area, they do have rent controls. So there is an artificial dampening, if you will, of rent growth based off of [government] policy.

You have mentioned before there has been quite a bit of building nationwide in the upper rent tiers, but a shortage of affordable apartments. Do you see that changing?

Not really, because with what you look at, it just doesn’t pencil out to be able to make an investment worthwhile, to take and build for affordable housing. You obviously need there to be a [government] stipend. What you see is a lot of people working within city governments, state governments, county governments that are looking to try and interact with [policymakers] to increase housing. Our position is such that the rate of return for affordable-type housing [absent government support] just doesn’t provide the fiduciary metrics that one would be looking for.  

What is your longer-run outlook for rental rates?

A continued increase. Each market will be different. There is a cycle that nobody can predict exactly. There will be downturns in the economic cycle, but nevertheless, that would have an insignificant impact in terms of rental rates. Again, it gets back to one of the primary needs of people is housing. How do they react to that? Where do they go? Do they rent? Do they buy? We don’t see any major national policy changes that would affect [the rental market] significantly. We think rental rates, and the rental market, will continue to be bullish.

The economy is doing incredibly well now, but what happens to the apartment market if we see a downturn?

It certainly would affect everybody, the home-purchase market as well as the rental market. You would see the market reacting. You would see people doubling up, getting roommates. Unless Fannie Mae and Freddie Mac were doing something dramatically different than they were today, I think you would have a much more dramatic impact on the single-family [home-purchase market] than on the [rental] side. I am not saying it is going to be to the degree that the 2008 [meltdown] was. If the economy slows, it certainly would be an inhibitor to homeownership.  


 

Questions? Contact at (425) 984-6017 or victorw@scotsmanguide.com.

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