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Apartment development is like soup
Published January 25, 2013
A lot of investors are nervous about all of the new construction planned for the next few years. That's understandable. Developers opened an average of 3,200 units a year over the past 10 years. Our Apartment Development Report, updated weekly, shows that between now and the end of 2015, developers plan to open more than 9,000 units a year in 208 projects.
It would be helpful to look at apartment development as just one ingredient in a soup recipe called the Puget Sound apartment market. We shouldn't think about apartment development in a vacuum. We need to think about it as one ingredient in a recipe. Take eggplant soup as an example. There’s a lot more in it than just eggplant. There’s stock, leeks, potatoes, onions, garlic, and more. So let's look at some important ingredients in our apartment market soup.
The first ingredient is perspective. Here’s what development activity looked like over the past 30 years. Developers opened an average of close to 38,000 units between 1988 and 1990. But things were different then. We had a booming economy back then, with the region adding just over 200,000 jobs. We’re not going to come close to that level of job growth any time soon. Conway Pedersen Economics forecasts the region will add 137,000 jobs between 2013 and 2015.
Plus, the apartment market benefited from all the baby boomers entering the housing market back then. So we really shouldn’t compare development activity in the late 1980’s with development trends now. Or should we?
Shifting housing types
There has been a dramatic shift in the share of total housing development going to condos and single-family. In fact, they have been virtually nonexistent over the past few years. That will change again in the future. But, at least for now, apartment development plays a much larger role in total housing development.
So when you add it all up, developers are building fewer total housing units in the next few years than they did in the late 1990s boom or in the late 1980s boom.
The next ingredient is new housing consumers. Eighty million+ baby boomers grew into their 20s during the 1970s and early 1980s, fueling housing demand through the 1980s. Then came GenX, half the size of the boomers. That kept the number of 20-somethings flat during the 1990s. And developers built fewer apartments.
Over the past few years GenY has been moving into their 20s. That would have fueled housing demand faster if the economy had been better. But the economy is improving, so this growing group of 20-somethings should fuel apartment demand for at least the next few years. That is as long as they can find a job.
Talking about jobs leads us to the next ingredient. We’ve talked a lot about the “Geezer Effect” in and it’s likely impact on the job market and rental market in The Apartment Advisor over the past few years. The bottom line is that Gen Y is almost as big an impact as the baby boomers were. And now, because of the Geezer effect, people will be leaving the workforce twice as fast as they used to.
That makes room for more Gen Y workers even with less job growth. And, at least for the next few years, most Gen Y’s will opt to rent. Not just because renting is more popular or practical. But also because it has always been normal for people in their 20s to rent.
So when you look at the whole recipe, here’s what you get.
We are not saying vacancies will not go up. In fact, they will. And that’s not all. Our current forecast, which we will update in the April Apartment Advisor, expects vacancies to climb steadily through early 2015. In addition, rent growth will slow and concessions will increase, causing net operating income to deteriorate between now and early 2015.
But there are a lot of ingredients in the apartment development recipe that not only soften the blow, but suggest that developers are building a reasonable number of units. There’s the shift toward more rental housing compared to condos and single-family. There’s the surge of 20-somethings. And there’s a new, never seen before trend; the rise of the Geezers. Their retirement opens the door for more 20-somethings in the workforce.
Be sure to check back next week for a new discussion of current apartment trends for the Puget Sound region.
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May 18, 2013
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