Job Losses Compound Multifamily Housing Woes
With the children of parents born during the post-World War II baby boom nearing a time when they will form households and rent apartments in large numbers, the nation’s multifamily housing industry is looking forward to a glowing future. In the meantime, however, times have grown exceedingly tough for the multifamily sector, which declined sharply following last fall’s meltdown in the credit markets and is weakening further as the nation’s economic recession and job losses intensify.
Industry leaders and housing economists participating in NAHB Multifamily’s Pillars of the Industry Conference in San Diego on March 17-18 noted that the production of multifamily housing has plummeted and said that it will take some time before the marketplace returns to normal.
NAHB Chief Economist David Crowe voiced optimism that the single-family market is nearing a bottom, largely as the result of the massive economic stimulus package enacted last month. Home sales, he said, are expected to bottom out in the current quarter and starts should show “some recovery” in the second half of the year. However, he noted, the improvement won’t be “robust” because of the large overhang of vacant homes on the market.
“The multifamily side will not be as quick to recover,” Crowe said, with the credit and equity needed to start new developments “hard to get” and the industry facing stiff competition from unsold housing that is being rented out until better times arrive. “A lot of your customers are people who have lost jobs,” he added.
Multifamily production will hit a trough of roughly 105,000 rental units annually in the third or fourth quarters, he forecasted, and about 60% of what is started will be housing financed with low-income housing tax credits. Activity, however, “will pick up in 2010 as the overall economy is revitalized,” he said.
A Silver Lining
Economist Ron Witten, president of Witten Advisors, was even gloomier in his short-term projections for multifamily rentals, which he predicted will fall below 100,000 this year, a record low, and head toward the 90,000 level in the year’s final three months.
“There is a silver lining,” Witten said. Once the recession passes and jobs come back, in about 2011, “there will be more apartments rented than ever before” and net demand could surge by 500,000 units.
The rents that multifamily developers will be charging this year will fall an average 5%, he said, and there will be some further decline in 2010 before rent growth rebounds at a rapid 7% pace in 2011.
“Seven percent sounds great,” Witten said, “but it’s really money you thought you already had.”
The rental market lost a record 120,000 residents in the fourth quarter of last year, he said, and the deep job losses expected in 2009 — at an average monthly pace of 400,000 and bottoming out in the third quarter — will further undermine housing demand.
About 4.3 million jobs have been lost in the past 12 months, Witten said, more than in any previous post-war recession, and a total of seven million jobs will be lost by the time the downturn ends. When the recovery gains steam in 2011, he said he expected the economy to produce “a couple of million jobs,” which would be far shy of replacing all of those that had been lost.
“It will take a while to recover from this deep trough,” he said. “This recession is so deep and housing so competitive” that none of the 42 major markets he tracks will have 3% rent growth this year. “The broad trend suggests some real short-term challenges,” he said.
State of the Industry
The CEOs of the industry’s leading multifamily companies and a CEO of one of the nation’s largest single-family companies led a conference discussion of the state of the multifamily industry, and overall they indicated that they are holding on as best they can by finishing projects that were already in the pipeline, managing assets, improving their net operating income, finding the liquidity they need to ride out hard times, downsizing and preparing for the abundant opportunities that are expected to materialize during the recovery.
The industry leaders voiced concern that the current decline has yet to run its course and that there remains a great deal of uncertainty over what will happen in the months ahead.
“The bottom will hit when people who are employed stop acting like they’re unemployed,” said Connie Moore, president and chief executive officer of BRE Properties.
Moore said that her company has projected negative rent growth for the next two years from its apartment communities, which are mostly located in California, and is focusing on capital preservation and “making sure we have a balance sheet to withstand this.”
In the past, she said, BRE has used property sales as a source of capital, but in the current market that is “now more challenging." For capital, Fannie Mae and Freddie Mac have gained significance, she noted.
Improvements in Single-Family
Jeff Mezger, president and CEO of KB Home, noted that the single-family sector is beginning to see improvements that are setting the stage for the full-scale housing recovery that will eventually encompass multifamily activity.
KB Home last year delivered 12,000 homes, down a third from its output in 2007, Mezger said, and is now focused on the balance sheet and a shift away from move-up product to lower-cost homes for the consumer.
Mezger said that the new home market should turn up about a year before rentals, and it is approaching a bottom, with some markets — such as San Diego County — starting to perform better.
Southern California’s home resales were up 200% in February from a year earlier and have been on an upward slope for seven consecutive months, he reported. There is now a six-month supply of resale homes in the six-county region and prices have stabilized, he said, “although nobody likes the price.”
Pricing is now in step with the 3% annual wage increases that employees have averaged over time, he said, and that will remain the market reality for about three to six years once the market stabilizes.
Pent-up demand has been pushing sales up in Southern California despite its 11% unemployment rate, Mezger said. “If you stay in A submarkets and locations and meet median incomes, you can do well. You have to figure how to make money at much lower prices.”
George Marcus, co-founder and chairman of Marcus & Millichap Company, noted that housing is also doing relatively well in the San Francisco Bay Area, with 30,000 to 40,000 resales a year. “If you are properly priced, you are doing fairly well,” he said. However, homes under $600,000 have been “devastated,” he said, while those above $1 million have been largely unaffected by declining prices.
Worried About Value
On the multifamily side, with the price of constructing a five-story apartment building in that market averaging $500,000 a unit, “it’s a serious problem,” he said. While there are a huge number of prospective renters in the area, “you have to have the price structure to compete” for them.
Charles Brindell, Jr., president and CEO of Trammell Crow Residential, voiced concern over the 16,000 units now in construction that will soon be completed and brought to market at a time of deterioration on the job front.
“We worry about the value of what we thought we had created,” Brindell said. This year’s deliveries, he projected, “won’t get to where we expected they would be until 2013.”
Until the market improves, “we are focusing on the asset management side,” he said, “not just property management but the whole mix of managing our investment.” This is where the value will be created, he said.
No Good Crystal Ball
Joining the chorus of those reporting a greatly diminished multifamily marketplace, Ron Ratner, executive vice president and director of Forest City Enterprises, Inc. and president and CEO of Forest City Residential Group, reported that his company won’t start anything this year, following $1 to $1.2 billion in starts last year. It might break ground on an office building next year, he said.
“I am skeptical about when we are coming out of this,” he said. “Our concern is we don’t have a very good crystal ball.”
Among the hardest things for the people who have built their companies, he said, is the issue of downsizing. “We are laying off people who have been with us for 18 years,” he said. “The severance check and the bonus check are in the same envelope.”
With major job layoffs “just starting to occur," unemployment heading beyond 10% and households losing income from second jobs and other sources, “there’s a lot more negative impact coming to rentals,” Ratner said. “The bottom looks like something we will be skittering along.”
Condos That Won’t Sell
“Getting projects started today is virtually impossible,” said Leonard Wood, founder of Wood Partners, LLC. “We are working on our operations and trying to get as much net operating income as possible. Liquidity is a huge part of what’s going on.”
Wood said that he is focusing on refinancing condominium apartments that won’t sell and on rightsizing to a smaller staff.
On the apartment side, there has been some decline in rents and vacancies have been creeping up, he said. On completed condominiums, he said he was able to largely finish off his sales though auction at significantly reduced prices.
But “projects not as far along are very problematic,” he said. “They are not selling at all in good locations in Atlanta” and less than half are sold, raising concerns about the availability of financing for prospective buyers and the cost of maintenance. “There is no recovery other than people buying at the bottom,” he said.
Until the market shows some improvement, “we won’t be starting many assets,” Wood said. “It’s better to save money until you can get the yield.” In preparation for the recovery, “preserve capital,” he advised, and “get people ready so you don’t need to solve problems” when it’s time to start building again, which is “an important part of being successful.”
“This industry is in a tough decline. We’re down but not out. We’re helping each other climb out of a deep hole,” said Steve Patterson, president and CEO of ZOM Holding Inc. and chairman of the NAHB Multifamily Leadership Board.
“The next 12 months may determine the direction for many of our companies,” he said. Working with home builders associations and with peers, most will find the innovations that enable them to meet the needs of a changing market, “and most will survive.”
For information on multifamily resources available from NAHB, e-mail Ann Marie Moriarty, or call her at 800-368-5242 x8350.