Apartment Market Rebounding: Five-Year Forecast
Even though the industry was severely hurt at the onset of the recession, the subprime mortgage crisis pushed people out of homeownership and into renting. The increasing demand, combined with a shortage of available rental units caused by industry pullback during the economic downturn, decreased rental vacancy rates and allowed landlords to raise rents.
Initially, rising unemployment and decreasing incomes caused by the economic downturn forced many people to move back in with their families or look for cheaper apartments, which in turn decreased demand for apartments and reduced industry revenue. This caused strain on the many firms that found themselves overleveraged from boom-time expansion. Subsequently, they laid off workers, cut down capacity, stopped development projects and, in some cases, exited the industry.
However, the same economic factors that caused so much damage to the industry also forced people out of homeownership. Lack of work and declining wages made it unaffordable for many to keep their homes or buy new ones, causing homeownership to decline and forcing many to rent. The rise in demand combined with a reduction in supply drove the rental vacancy rate in 2013, allowing landlords to increase rents and profit margins. Therefore, by 2013, industry revenue surpassed its prerecession peak.
The Apartment Rental industry is mainly composed of small, independent lessors, with the top four companies (including Equity Residential, AvalonBay Communities Inc. and Apartment Investment and Management Company) accounting for a reasonable portion of industry revenue in 2013. This leaves the remaining firms to compete over the remaining market share. Prior to the recession, larger players aggressively expanded their real estate portfolios by leveraging assets and issuing equity. Nevertheless, when the recession hit, demand for apartment rentals nosedived and companies found themselves with reduced cash flow from rents and stakes in devalued, vacant or non-finished properties. To make things worse, the financial crisis severely restricted debt market liquidity, forcing overleveraged firms out of the industry.
According to IBISWorld Industry Analyst Maksim Soshkin, over the five years to 2018, industry revenue is forecast to rise, as the economy improves. Moreover, the unemployment rate will drop and incomes will rise, enabling people to afford renting and paying higher rates. In addition, an ever-increasing number of young adults, the age group most likely to rent, will enter the labor force. They will stay single longer and prefer to live in cities. Without their own family, many of them will hold off buying a home.
However, improving economic conditions will help others buy a home, thereby sapping demand for apartments. Yet, stringent mortgage lending and increasing interest rates will subdue this threat, says Soshkin. Furthermore, since most of the future industry growth will take place in urban areas where homeownership is expensive and low, many participants will be insulated from housing market competition.
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