The worst-case scenario for the U.S. economy and financial system was averted in the Great Recession of 2008-2009, notwithstanding its severity. The stabilization of the global fi nancial system ushered in greater appetite for risk and opportunistic buying — reflected in the global equity market surge — much faster than the most optimistic forecasts. Job cuts fi nally abated to reasonable levels in late 2009, and several downward revisions to prior months’ losses were characteristic of an emerging turn in the employment cycle. As we look ahead, we still face a myriad of challenges, starting with high and rising unemployment, record consumer debt, and the eventual need to clean up the government balance sheet. Judging by the extended period of time required to recapture lost jobs after the last two recessions, companies are likely to enter expansion mode cautiously.
Apartment owners and investors should be prepared for tepid job creation in 2010, with the year expected to be somewhat of a staging period for an eventual acceleration in employment growth, likely in 2011-2012. Severely high unemployment among 20- to 34-year-olds will hamper renter household formation in the short term. The sheer size of the echo-boom generation, however, only moderately smaller than the 80 million baby boomers, along with a drastic pullback in housing construction, points to strong rent growth starting in 2011. It is simply a matter of time before an expanding economy releases this powerfully favorable demographic into the renter pool.
Investors began positioning ahead of this macro trend in 2009, concentrating their bets on quality assets in stronger metros and/or submarkets. A relatively brief period of rising cap rates gave way to multiple offers from credible buyers and cap rate compression in the upper tier of the apartment market, as positive leverage and prospects for strong income growth overtook fear. In 2010, risk tolerance should gradually spill over to the broader market as an economic recovery becomes more convincing. Nevertheless, investors will continue to demand due reward for the additional risk associated with value-add deals. Conversely, visions of quality assets coming to market at fi re-sale prices will continue to fade, and buyers and sellers will move closer to redefi ning fair value based on true assessments of quality and risk. More distress is sure to come to market, but the quality will be highly mixed as lenders avert further losses by avoiding foreclosure on performing assets and those with reasonable prospects for stabilization.
The drivers of increased sales activity began to align in 2009, but for extremely tight underwriting and limited debt availability outside of GSEs and some banks. Life insurance companies started to show renewed interest, but capacity limitations cap the potential for a 2010 surge. Assuming government-mandated changes to Fannie Mae and Freddie Mac steer clear of their multi-family lending arms, the GSEs should remain the primary sources of fi nancing for apartment investors. This year, more foreign investors, REITs and institutions will join private investors, who dominated acquisitions last year. Expectations for near-term weakness will be overshadowed by increased visibility on fundamentals, more reasonable cap rates and prospects for above-trend rent growth in the years to come.
To assist you in planning and executing a successful investment strategy, we are pleased to present our 2010 National Apartment Report. Included is our National Apartment Index (NAI), a forward-looking ranking of 44 markets based on forecast supply and demand conditions. We hope you will fi nd this report helpful, and our investment professionals look forward to assisting you in meeting your goals.