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Analysts See Signs of Ongoing Growth in Apartment Sector

02/01/2013 | By Carisa Chappell

Analysts See Signs of Ongoing Growth in Apartment Sector

Even as rent growth and demand for space are expected to level off, reasons for optimism about the strength of the apartment sector going forward still exist, according to analysts.

Andy McCulloch, managing director with research firm Green Street Advisors, pointed out that household formation, which hit historically low levels between 2006 and 2011, is on the rise.

While a larger percentage of those new households are expected to begin buying homes, McCulloch said there will still be enough demand for apartments to keep the sector busy. Other catalysts for growth exist, too, according to McCulloch, including conservative lending standards.

“You also have structural and demographic factors,” he said. “Younger people tend to be renters when coming out of school, and people are getting married later.”

The demand in 2013 bodes well for owners who hope to continue pushing higher rental rates, according to McCulloch. Looking ahead, however, Green Street is forecasting a slowdown in rent growth.

“Rental rate growth has far outpaced income growth, which will result in greater tenant pushback on landlord rent hikes,” he said.

A new supply of apartments is also starting to hit the marketplace. Green Street is projecting that meaningful deliveries will likely hit first in the urban cores of Washington, San Jose, Seattle and Texas and then began to expand more broadly after that. McCulloch downplayed the idea that the influx of new apartment units would negate the currently favorable supply-demand dynamics for landlords.

Mark Obrinsky, vice president for research and chief economist at the National Multi Housing Council (NMHC) agreed that the effects of increased supply should be minimal.

“New construction has picked up considerably since its 2009 low, but is still playing catch-up with the increased demand for apartment residences,” he said.

Obrinsky added that while there was a small drop this month in the NMHC’s Market Tightness Index, a measure of apartment market conditions based on a survey of apartment sector executives, January is typically a weak month for the multifamily sector.

“Beyond that, markets were quite tight three months ago and remain tight today,” he said. “The pace of improvement in the apartment market is moderating, but the expansion remains solid.”