Are You Ready for the Next Apartment Boom?
The past year has been a wild ride in the real estate and financial markets, a ride that has produced record numbers of foreclosures and declines in residential home values. The financial backbone of the country has been shaken to the core. Multitudes of banks have gone under, and those that are left have tightened their lending criteria to the point that only those with excellent credit and large down payments qualify for mortgage loans.
Even with the massive government bailout package, the economy is still weak; the unemployment rate is at double digits in some areas of the country and the auto industry is all but bankrupt. However, there are signs that the depression is waning; a glimmer of light can finally be seen. Even so, the housing market is turning toward apartment living. Many people still do not qualify for mortgage loans, as many have high credit card debt, and others are dealing with the tough realities of bankruptcy.
We have an excellent opportunity to learn from history. Back in the late 1980s and early 1990s, the real estate market hit a few bumps. Real estate values took a downturn and the savings and loan industry went belly-up and was taken over by the federal government. Does this scenario sound familiar?
Throughout most of the 80s, the rental market had been strong and apartment building, fueled by tax incentives, was hot and heavy. Builders were putting up new units as fast as they could. By the late 80s, the number of apartment units finally caught up with the demand, but the building continued until there was a huge surplus of apartment units available with few new renters in sight. Full-page ads appeared, and some of the new apartment complexes even offered six-months free rent with the signing of a one-year lease. Vacancy rates in older units started to climb and investors started losing their properties to foreclosure.
At the same time, other investors who had purchased properties right were able to reduce their rents, keep their units mostly full, and weather the storm. Wise investors took advantage of the properties that were being sold at discounted prices.
Further into the 90s, the real estate market recovered and those who had weathered the storm and purchased properties at highly discounted values were happy campers. Rents increased, property values went up, and millionaires were made.
Those who were creative were able to keep their properties during the down cycle. One investor, who purchased an older apartment complex and obtained seller financing, saw his vacancy rate climb above 35 percent due to the newer, larger complexes offering huge concessions to new renters. This created a substantial negative cash flow for his property. He went back to the original owner and told him he was going to have to give the property back unless they could modify the terms of the note to allow him to reduce rents and the vacancy rate. The previous owner agreed and he was able to live through the down market.
We are approaching the fourth quarter in 2009; the real estate market is in another down cycle and properties are being sold at discount prices in many parts of the country. Many experts are projecting the apartment rental market may have record-breaking years in the near future. Below are some of the factors that indicate possible growth in the rental industry:
• Foreclosures – With foreclosure rates skyrocketing over the past couple of years, people who lost their homes just don’t disappear; they need to live somewhere. Although some people displaced by a foreclosure move in with family, most become renters. That is good news for the apartment industry. Higher demand and lower vacancy rates will soon equate to an increase in rental demands.
Despite efforts by the government to help homeowners keep their homes, foreclosures are likely to continue. Wise investors, who position themselves to fill the forthcoming housing need, will be well-positioned to take advantage of this growing market.
• Declining home ownership in the United States – According to the U.S. Census Bureau, home ownership had reached approximately 63 percent in 1965 and climbed to 65.5 percent by 1980. It then declined to an average of 64 percent until 1995. In the following years, homeownership climbed to its high of 69.2 percent in mid 2004.
The dramatic increase was fueled in part by the subprime mortgage market. Banks loaned to borrowers who had substandard credit, and thousands signed up for mortgages they could not afford. A buying frenzy occurred, with easy money and credit available. Now, those very same people are losing their homes to foreclosure, thus lowering the percentage of homeowners in this country.
U.S. homeownership is dropping at record rates. At the first of this year, an estimated 67.4 percent of Americans owned homes. A Chicago-based real estate blog recently estimated that the percentage of Americans who own homes fell 2.3 percent in the second quarter of 2009. That is a decrease of nearly two-million homeowners. Where are they going to live? In one study, Arthur Nelson, a professor with the University of Utah, estimates that home ownership will continue to decline over the next two decades or so and could drop to around 60 percent.
• An aging younger population – the children of the Post-World War II baby boom are now at the age at which they are settling down and looking for a more stable housing situation. Estimated to be 84 to 85 million in number, Generation X will be flooding the rental market over the next decade.
Unlike their parents, many have little or no savings, and do not qualify for a home with the new higher lending standards. Nowadays, having a co-signer or borrowing a large down payment from mom and dad is no longer an option. Today, many moms and dads do not have extra money and are concerned with their own financial security; the stock market drop, pension plans going belly up, and many close-to retirees being downsized just before eligibility for full retirement would have begun have all contributed to financial concerns.
• Uncertainty in the job market – The only thing sure about employment today is that you probably won’t have the same job in five years. Generations X and Y understand this and want to remain mobile so that if they get laid off, they can go to another city to find employment. This contributes to an even bigger demand for apartments and rental units.
• Modern apartments – Modern apartments are more like condos and townhomes, with nine-foot ceilings, bedrooms with lots of windows, big bathrooms, decks, fireplaces, island kitchens with granite counter tops, full-size washers and dryers in every unit, and exercise facilities.
Living in the modern apartment isn’t all that bad; in fact, for many, it may be much nicer than the homes that they could have afforded. Additionally, many of these new apartments are being built close to major places of employment. Younger generations do not like a long commute. Housing close to larger cities tends to be very expensive, even in today’s market. So why not rent, get all the perks, and have a shorter commute to work?
• An aging older population – Partly due to the down economy, but largely due to poor saving and investing habits, many baby boomers now reaching retirement age do not have enough money to retire and many, due to declining health, can’t continue to work. Many will have no choice but to live in apartments. Smart investors will prepare to meet the needs of our aging population.
A new report released by the National Apartment Association (NAA) projects new apartment building demands to be $1.1 trillion by 2030. Will you be part of the upcoming apartment boom? You can be, but you need to prepare now!