January/February 2010 Newsletter
Our View of the Marketplace in 2010
Joe Greenblatt, Chief Executive Officer
It’s hardly news anymore – 2009 left much to be desired, representing "the economic perfect storm" according to Arizona State University’s Director of Realty Studies, Jay Butler. Mr. Butler expressed surprise at the severity of the recession, largely due to the sharp drop in home values and jobs and the wide variety of industries which were hurt.
But as Shakespeare noted in the aptly-named play The Tempest; “What’s past is prologue”. Looking forward into the new decade, it’s fair to ask what the future holds for us as an industry. Our crystal ball shows this to be a decidedly mixed bag:
Our region remains inconsistent. University of San Diego economist Alan Gin has compiled an index of leading economic indicators for San Diego real estate that tracks housing permits, want ads, consumer confidence, employment rates, local stock prices and national economic growth. All were pointing up in December, indicating a positive outlook in 2010. “The signs of growth we’re seeing are suggesting that our economic engine is warmed up and is ready to go,” says Murtaza Baxamusa, director of research and policy at the Center on Policy Initiatives in San Diego, commenting on the index’s findings.
Even as southern California starts pulling itself out of the economic doldrums though, Arizona’s economy continues to struggle with unemployment statewide topping 9% in December. And it may get worse before it gets better, according to Marshall Vest, Economist at the University of Arizona. “Unemployment will top 10 percent in the first quarter, then retreat.” he says, adding his expectation that Arizona’s economy overall will recover slower than the national economy. This is no surprise to residents of the five MSA’s of the Canyon State, each of which saw unemployment rise by two percentage points or more during 2009.
MPF Research tracks 64 markets in the region, and their spokesman, Greg Willet, expressed cautious optimism about the southern California markets.
He observed occupancy in select areas beginning to regain a little of the ground previously lost. And while rents have continued on a downward path, the size of the cuts have been getting a little less severe than had been the case earlier. It’s not much, but it IS a step in the right direction.
Willet’s results indicate employment is slowly improving with occupancy and rent rate declines having bottomed out. He expects occupancy to inch up, rising between 0.3% and 1.1% annually over the next three years across San Diego, Orange, Los Angeles and Riverside Counties. He also anticipates flat revenues in 2010, with modest revenue growth resuming in 2011.
Mr. Willet also noted some improvement in discreet sub-markets in the Phoenix area, but generally expects the Arizona markets to remain sluggish for the next several years, grappling with a significant supply/demand imbalance.
Apartment industry market conditions haven’t changed nationally for roughly six months, according to the National Multi Housing Council’s latest Quarterly Survey of Apartment Market Conditions. Perhaps our part of the economy may have finally hit bottom?
This is good news for owners with their cash flow under control, who at this time should be aggressively planning for the future.
Once again, however, markets aren’t responding equally. Phoenix’s average rent (reported from November) was below $682, and both the one month rental average and the moving three-month average rent composite illustrated a weakening rental market. Perhaps the only bright spot in Phoenix was the lower participation rate in rental concessions. San Diego, Orange and Los Angeles County apartments are currently dealing with vacancies in the five percent range.
We need to get organized. At the 2009 Governor’s Housing Forum, Arizona Department of Housing Director Michael Trailor stated; “Arizonans who cannot afford market price homes or rentals are growing in numbers and our resources to serve them are shrinking.” Given the huge deficits that have left governments at every level in both Arizona and California in financial disarray, we should take Mr. Trailor’s words as a warning that investment real estate owners need to get more organized and provide unity to their message. Without this unity, it seems safe to conclude the industry will be targeted for additional taxation and regulation.
Cash remains king. Again assuming you have money in the bank and your cash flow under control – that you have staying power, property owners have potential to do well over the next few years. The credit markets have been so painfully tight for the past couple of years that few new communities are being initiated. Credit has been squeezed so badly that companies like Home Depot are looking to property owners to personally guarantee their purchases of maintenance materials. OUCH!
Nathan Topper, Associate economist at Moody's, may have said it best when observing in a recent interview that he was “…surprised by the severity of the credit market shutdown and its impact on even the most creditworthy businesses." Field reports of credit card companies slashing credit limits across the board – even for businesses with good credit ratings – complement Mr. Topper’s findings.
True, there was a small uptick in sales volume and equity financing during the most recent quarter, but there remains a seriously constrained supply of property in move-in condition, And financial institutions across the board don’t seem to be in a hurry to rent properties in foreclosure. Additionally, industry experts speaking at the National Association of Home Builders’ International Builders’ Show noted it takes 2-3 years to build a new apartment community.
These factors have potential to combine and provide substantial competition for available rental units and, ostensibly, higher rents.
Economic fundamentals are being put into place now. Jobs are starting to return, international markets appear to be stabilizing, and the political campaigns of 2010 aside, things should increasingly return to normal. Beckie Holmes, Chief economist at Cox Communications in Phoenix, predicts “Gradual improvements with job losses, stabilization and possibly modest growth in retail and health care and more jobs in temporary employment agencies in the coming year.” This attitude seems to be widespread. The Federal Reserve is already looking at ways to remove the props from the American economy, suggesting the worst is truly behind us.
Military activity appears to be increasing. At least in southern California, more military personnel and equipment are moving in. For these markets more people will need to find rental housing for the foreseeable future. The Pentagon had no comment regarding plans regarding the six bases (two army, one navy/marine, three air force) in Arizona.
People are on the move. An Apartments.com national survey shows over 95% of renters across the country planning to relocate to a new apartment this year. They’re also moving sooner, with 40% saying they’ll pack up during Q1 2010 (up 16% over Q1 2009).
Generation Y is coming…QUICKLY! The next big wave of newly-formed households belong to Generation Y professionals. Expect them to focus on multifamily housing, increasing upward pressure on rents and providing more opportunities to owners. The geographic spread for this next generation appears consistent with preferences of previous generations.
“Commodity think” may be dissipating. Price may no longer be the most important factor when deciding which apartment to rent. Nearly 40% of renters told Apartments.com they are moving because they want to live in a nicer apartment located in a neighborhood where they feel safe.
Furthermore, nearly 60% of renters moving this year said they are either paying the same or more in rent as last year. They are factoring in how their new home will suit their needs and lifestyle, looking for more convenient commutes to work, family and school, and in some cases want more space to start a family or to double up with roommates.
This willingness to make price a secondary consideration means our ability to provide consistently good resident services and a reputation for delivering solid, positive, ongoing customer relationships may be the primary tie-breaker when a new home is being debated.
Demographics are in our favor. One baby boomer turns 65 every eight seconds, and the 76 million members of that cohort are largely through with winter. While the US Census Bureau projects California’s population over the next 20 years to grow by 37%, new residents over 65 will increase by 130%. Arizona’s senior population will increase by 255% in the same period – more than double the growth of the state’s overall population.
Activity is picking up. Both San Diego and Orange Counties have recently been among the top seven metropolitan areas in California for apartment activity.
Even though financing remains tricky with investors of every stripe, lining these issues up side-by-side spells a severe shortage of apartments in the near future in every market, just as the need for them begins to increase dramatically.
Our conclusion: There are still some rough times ahead for the industry, but things seem to be moving in the right direction. As the analysts at MPF Research observe; “Looking ahead, 2010 should be considerably less painful than both 2008 and 2009 were, though meaningful recovery in most cases probably won’t kick in until 2011 and 2012.” And from what we’re seeing, as the supply and demand levels even out – especially in Arizona’s markets – we should all start seeing our columns of figures more consistently move from red to black.
Our recommendation: Continue getting all your ducks lined up now for financing, maintenance, leasing, and marketing.
As Ms. Holmes of Cox Communications in Phoenix put it: "The imbalances here in real estate and the severity of the state budget crisis are more pronounced than in the rest of the nation." However, it seems like the ground is about to shift again under our feet, and there are long-term opportunities for those with the ability to hang on long enough.
And if you have any questions or concerns about these or any other issues involved with keeping a residential property profitable, let the experts at Sunrise know. We have over 30 years of experience helping with every imaginable issue you’re likely to encounter, and probably already have your answer at our fingertips.
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