As Housing Recovers, Will Apartment Boom End?
The latest reports on new and existing home salesseem to indicate that the housing market is beginning to find its footing again. While most believe the recovery will be slow, U-shaped, and bumpy, the free fall appears to be over for both sales and prices.
This is not to say that factors like rising mortgage interest rates and economic instability overseas couldn’t set the recovery back a bit, but, again the general consensus is that the worst is arguably over. \(Read More: New Home Sales Rose 3.6% in July, but Prices Fell.\)
If that is in fact the case, then we have to ask what effect that recovery will have on the recently booming apartment sector, which benefited from the housing crash.
Rents are sky high in most of the largest U.S. markets, and vacancies are down and still falling. Multifamily housing starts were up 30 percent in July from a year ago, according to the U.S. Commerce Department, and multifamily permits were up over 47 percent.
Supply increases are a potential risk to the multifamily sector, and high prices have caused investors to sour on the sector of late. But some say multifamily isn’t exactly heading into the woods. The fundamentals are still strong. (Read More: A Tale of Two Housing Markets: Single and Multi Family.)
“Realistically trees don’t grow to the sky,” said David Toti, a multifamily analyst at Cantor Fitzgerald. “The apartments have had spectacular growth since the depths of the recession, and at a certain point that growth has to moderate. You can only raise rents so much before you force people out.”
Toti noted that multi-family REITs are still doing better than other sectors, despite the fact that dedicated investors have started to rotate out to suburban office and select areas of retail and self-storage. Toti also believes that an improving single family housing market can co-exist for a while with a strong apartment market, and others agree.
“Modestly favorable home-buying indicators are not coming at the expense of apartment rent trends,” wrote Sam Chandan of Chandan Economics. “Multifamily fundamentals continue to improve in advance of pending inventory additions from the construction pipeline.”
The fact is that despite a recovery in single family housing, we are not going to see a housing boom any time soon, and you can thank the still tight credit market for that. (Read More: US Home Builders Begin to See Credit Thaw.)
There has also been a fundamental, cultural shift toward apartment living over the past decade that will drive ever more apartment demand.
While single family homes account for 80 percent of total residential building stock, according to the U.S. Census, that number may be shrinking.
Single-family homes have grown in number and size over the past 60 years, according to a new report from Pike Research (part of Navigant Energy Practice), "but by 2021 the total area of single-family homes in the United states will have shrunk by nearly 4 billion square feet, contracting at a negative compound annual growth rate of 0.2 percent."
“For the first time since World War II, the United States is experiencing increased levels of urbanization,” said Pike senior research analyst Eric Bloom. “As more people move into cities, they tend to occupy apartments, condominiums, and other attached multi-unit housing types. By 2021, over one-fourth of the residential stock of the United States will be in multi-unit residential buildings.”
Apartment rents, while still rising, are beginning to level off, as the so-called “affordability inversion” comes into play; that means that should home prices continue to fall in most markets, renting becomes far more expensive than owning. (Read More:Is the Apartment Rental Market Overheating?)
In major metropolitan areas, however, high prices are still supported by high demand, and that is why many of the major multifamily REITs like AvalonBay , Equity Residential and UDR are becoming increasingly urban, building towers downtown and selling older, more suburban portfolio assets.
“Apartments and single family housing can live happily ever after for a little while,” said Toti, who noted that the physical American house is shrinking due to environmental concerns, material costs and a general desire by recession-wary home buyers to carry less debt.
—By CNBC's Diana Olick