Recession Deepens Amid Accelerated Job Losses and Credit Freeze;
Massive Stimulus and Other Measures Underpin Stabilization in Late 2009
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First quarter job cuts remain extreme in reaction to financial
crisis. The escalation of the credit crunch to a full-blown financial
crisis was reflected in a fourth quarter GDP decline of 6.25 percent, the most severe
contraction since 1982. Furthermore, the near standstill of the commercial paper
market in late 2008 led to an acceleration in job losses, as some companies were
unable to make payrolls. Since November, cuts have averaged 650,000 jobs per month,
compared to an average decrease of 180,000 positions during the first 10 months
of 2008.
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Most economic news grim, but positive points should not be overlooked.
The housing market appears to be nearing a bottom in some markets, inflation concerns
have subsided due to dramatic declines in oil prices, retail sales figures have
been encouraging in early 2009 compared to previous months, and massive stimulus
and liquidity injections will ultimately help generate economic activity once credit
markets begin to unclog. Government intervention during this downturn has reached
unprecedented levels, with additional Federal action likely in the coming months.
Unlike other recessions in recent history, consumers lack the confidence and resources
necessary to mitigate this downturn, as home equity, credit, household wealth and
jobs have evaporated in recent quarters. This time around, business confidence must
first be restored, which will require the stabilization of credit markets and the
financial sector.
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Concerns regarding the national debt warranted, but government
intervention is necessary to reverse the negative feedback loop. As 2009
comes to a close, public debt as a share of U.S. GDP is forecast to exceed 85 percent,
up from roughly 60 percent in 2000 but still well below post-World War II levels
of 120 percent. In addition to the $787 billion stimulus package recently passed
by Congress, a housing bill is expected to be enacted in the near term that would
mitigate the pace of residential foreclosures and increase the availability of mortgage
credit. Assuming the bill passes soon, a pricing floor should be established by
early 2010.
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Forecast:
Elevated job losses should ease by midyear; at least
modest growth of 1 percent forecast for 2010. Since the contraction began,
4.4 million jobs have been cut, and peak-to-trough losses will likely approach 6
million positions. The unemployment rate already has spiked to 8.1 percent and is
expected to reach 9.5 percent later this year.
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Recession expected to be on par with the mid-1970s; housing will
greatly influence 2010 growth pace. U.S. GDP is forecast to contract
by more than 3 percent from the third quarter of 2008 through the second quarter
of 2009. Growth of approximately 1.9 percent is projected for 2010, assuming the
housing market begins to stabilize by the end of this year. Residential investment
has subtracted between 50 basis points and 140 basis points from GDP every quarter
since mid-2006; even a bottoming–out of the market will provide much-needed relief
to the U.S. economy.
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Heavy Job Cuts Snag Apartment Demand; Reduced Homeownership, Limited New Supply
in 2009-2010 Support Outlook for Swift Recovery by 2011
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Reduced confidence, deteriorating job market push vacancy higher.
Apartment vacancy increased to 6.6 percent in the fourth quarter of 2008, up 40
basis points from the previous quarter and 90 basis points from one year earlier.
Rising unemployment discourages household formations and forces many renters to
double-up, offsetting the impact of tighter residential lending standards on demand.
During the last six months of 2008, when unemployment pushed up 160 basis points
to 7.2 percent, the number of vacant units rose 13 percent, or by nearly 79,000
units.
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Hardest-hit markets those that flourished during housing boom.
Strong-growth markets such as Phoenix, Tucson, Las Vegas, Tampa and Orlando were
a focus for residential developers. The loss of housing-related jobs and the dearth
of new employment opportunities in these markets have given way to above-average
increases in vacancy over the past year, ranging from 160 basis points to 300 basis
points. Slower-growth Midwestern metros and land-constrained coastal markets also
are recording weaker fundamentals but are among the more stable markets nationwide.
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Disconnect persists; sellers adjust pricing expectations.
Apartment property sales slipped 50 percent last year due to a wide buyer/seller
expectation gap, a shift in the buyer mix and the constrained capital environment.
While Fannie Mae and Freddie Mac remain active lenders, CMBS financing is nearly
nonexistent and tighter underwriting prevails marketwide. As a result, cap rates
have increased 65 basis points to 200 basis points since the recession started,
with properties in secondary/tertiary markets giving the most ground. Though many
owners are well positioned to ride out the downturn after several years of strong
NOI growth and price appreciation, distress is on the rise. In addition, many institutions
and REITs will need to rebalance their portfolios and increase liquidity, resulting
in the availability of some top-tier properties this year. Cap rates are expected
to rise further in 2009, still driven by quality.
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Forecast:
Construction pullback under way. Developers are expected to complete
80,000 apartments in 2009, down from 93,000 units last year and the lowest level
of completions since the mid-1990s. This figure could decline further over the course
of the year, as some projects may be delayed until 2010 or abandoned due to difficulties
obtaining construction financing. Construction costs have ebbed, but declining rents
will make the justification of new development difficult in many major markets,
in turn setting the stage for a recovery starting in 2010 when completions will
fall even further.
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Demand-side weakness to outweigh impact of reduced development
in short term. The vacancy rate is forecast to increase 110 basis points
in 2009 as job losses hinder renter household formation. Vacant houses and condos
employed as rentals also will divert demand from apartments in the near term.
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Competition for renters intensifies; owners reduce rents, sweeten
concessions. The combination of weaker demand and competition from shadow
stock will place downward pressure on rents, resulting in a drop of 3 percent to
4 percent in effective rents nationally, driven by rising concessions. The degree
of rent decline will vary greatly by market.
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Apartment Market Vital Signs
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4Q 2007 to 4Q 2008 Change in Apartment Vacancy
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Top 10 Markets by Change in Vacancy
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| Metro | 4Q 2008 |
YOY Chg (bps) |
| Indianapolis | 7.6% | -70 |
| Milwaukee | 3.7% | -40 |
| West Palm Beach | 7.6% | -40 |
| Cincinnati | 6.7% | -30 |
| San Francisco | 3.6% | -30 |
| Minneapolis | 4.3% | 20 |
| New York | 2.3% | 20 |
| Oakland-East Bay | 5.3% | 20 |
| San Diego | 3.9% | 20 |
| Boston | 6.0% | 30 |
| US Metro Average | 6.6% |
90 |
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Bottom 10 Markets by Change in Vacancy
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| Metro | 4Q 2008 |
YOY Chg (bps) |
| San Jose | 5.2% | 130 |
| Las Vegas | 7.7% | 160 |
| Jacksonville | 11.6% | 170 |
| Tampa-St Petersburg | 8.6% | 170 |
| Atlanta | 10.2% | 200 |
| Charlotte | 8.0% | 200 |
| San Antonio | 8.7% | 210 |
| Orlando | 9.7% | 250 |
| Phoenix | 10.9% | 260 |
| Tucson | 11.2% | 300 |
| US Metro Average | 6.6% |
90 |
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Download the March 2009 Apartment Outlook Here