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The Perfect Storm
by Emily Landes
Optimism was not the order of the day at the 14th Annual Fisher Center Real Estate Conference this past spring.
In panel after panel, some of the country’s top real-estate analysts and commentators used meticulously prepared PowerPoint presentations to demonstrate exactly how far the market had fallen since just a few years ago, when real estate seemed like the world’s safest investment. In the commercial sector, peak-to-trough price declines of 40% to 50% were dutifully reported, as were projections that San Francisco downtown vacancies are likely to hit 16% in 2010—close to post-dot-com numbers. Several commentators made allusions to the Great Depression; one speaker even joked that it was no coincidence a suicide prevention conference was taking place down the hall.
The overextension of credit was fingered as the culprit for the current collapse. But the tightening of lending practices over the last year was singled out as one of the biggest contributors to the continuing foreclosure crisis and the lack of buyers in the market place. The dearth of deals makes it increasingly difficult to come up with accurate appraisals for properties. According to Robert Zerbst, former chairman and CEO of Richard Ellis Investors, the U.S. has seen an 86% drop in transaction volume over the last two years. Yet without any real sales data, the limited pool of investors who do have cash on hand are anxious about investing it, thus perpetuating the cycle. One analyst laughingly suggested that real-estate investors simply go on vacation for a few years, and check back in again in 2012.
Then, late in the afternoon, when attendees were clearly feeling the weight of all this portentous data, a brief glimmer of hope appeared: the apartment market. “We’re the most upbeat panel you are going to hear today,” began Lynn Sedway, the managing director of CBRE Consulting and the moderator of the apartment market panel. Surely, it would not have taken much to hold the “most upbeat” title at this year’s conference, but panelists had more than just positivity on their side; they had facts, figures and even the faint praise of mighty prognosticator Ken Rosen. The chair of the Fisher Center called apartment buildings “the best looking horses in the glue factory.”
Hope Nadji, director of economic and market research for RREEF Investments, started off what she called “the sunshine panel” by explaining why her company (which oversees asset management for Deutsche Bank) was pursuing an apartment-weighted investment strategy. She said apartments always lead the recovery out of a recession and pointed to data that showed in the early 1990s it took the overall market about five years to begin appreciating again, but it only took apartments three years. Plus, while total appreciation went down 32.3%, apartments only went down 16.7%.
She also believes that there may be a demographic perfect storm creating great demand for apartments in the next decade. A projected 1.5 million echo boomers and millennials (particularly those under 35) will be looking for rentals between 2010 and 2020. This group of singles and recent college grads will more than make up for the 500,000 Gen Xers (45 to 54 year olds) expected to leave the rental market during this period. But downsizing boomers will have a much greater impact than any of these other groups. Nadji said that if just 20% move into apartments, that accounts for 3.6 million Americans, almost 2 million of whom will be over 65. This demographic swing will be complemented by the fact that U.S. housing completions in the multifamily sector are well below trend, meaning that (especially in desirable locations like the Bay Area) demand should exceed supply into the foreseeable future.
But owners shouldn’t pop their champagne corks just yet. There’s still the matter of the next 18 months to get through before arriving at that pot of gold. Nadji said a nationwide vacancy rate of 8% is predicted for 2009-2010, with the expected reduced income that comes with it. Amir Massih of Archstone, which has over 70,000 units in its U.S. portfolio (including 8,000 in the Bay Area), said that rents are down and vacancies are up, even in the coastal markets in which the company specializes. He admitted that even though the company shares Nadji’s upbeat long-term vision, in the meantime it has had to let people go, cut way back on development and put more emphasis on its customer service. “There is no silver bullet,” he advised. “You just have to put one foot in front of the other on this rocky terrain.”
Further compacting the short-term downturn for owners is the so-called “shadow market”: condos and single-family homes that owners (and increasingly banks) must rent out because their values have dropped so far it doesn’t make sense to try to sell them now. Constance Moore, president and CEO of BRE Properties, said that landlords with Class A buildings in particular would be affected by this influx of shadow rentals. Tenants in Class A units are also moving in large numbers to B properties that offer more square footage for the money—another symptom of the recessionary condensing of households. Moore added that B properties may also be increasingly desirable because the current mood of the country makes it almost un-American to live somewhere ostentatious.
But, in the end, Moore and the other panelists believe that this pressure on landlords will be fleeting. “If you are a renter today, enjoy it,” Moore said. The consensus was that the multifamily market is poised to rebound—and soon. Moore predicted that even though the panel was certainly the bright point of the 2009 conference, it will be an even more enthusiastic panel by 2011. She predicts “an explosion of rents” in the not-too-distant future. The way these panelists describe it, the apartment market is like a wet fuse: all it needs is some time, a little heat and then bam—fireworks.
The opinions expressed in this article are those of the author, and do not necessarily reflect the viewpoint of the SFAA or the SF Apartment Magazine. Emily Landes is the managing editor of SF Apartment Magazine. Copyright © 2009 by Black Point Press. All rights reserved.